Japan’s GDP contracted by 0.4% in the last three months of 2023, compared to a year earlier, following a 3.3% shrink in the previous quarter.
The figures from Japan’s Cabinet Office released on Thursday suggest that the country has lost its position as the world’s third-largest economy to Germany.
The latest figures were the first reading of Japan’s economic growth for the period and could still be revised, hwoever, two quarters in a row of economic contraction are typically considered a technical recession.
According to IMF predictions, Germany will become the third-largest economy in the world in US dollars, surpassing Japan.
Japan’s possible decline in the rankings has been attributed to the weakening of the Japanese yen relative to the US dollar. Gita Gopinath, the Deputy Chief of the IMF, said that the yen’s about 9% decline versus the US dollar last year, was the reason for Japan’s possible decline.
Nonetheless, the yen’s depreciation has increased the value of the stock of Japan’s largest corporations, lowering the cost of exports to foreign markets. The decision by Japan’s central bank to increase borrowing charges may also be postponed by the most recent GDP figures since negative interest rates devalue the yen and deter foreign investment.
Japan enters a recession
Following the previous quarter’s recession, the nation’s GDP shrank by 0.4 percent on an annualized basis in the subsequent quarter.
According to official figures released on Thursday, the nation’s annualized gross domestic product (GDP) declined by an annualized 0.4 percent from October to December following a 3.3 percent decline in the preceding quarter.
According to the Cabinet Office, a decrease in private consumption was brought about by eating out and apparel consumption. Notably, almost half of the GDP is derived from private spending. It decreased by 0.2% compared to economists’ expectations of a 0.1% increase.
Japan has lost its title as the world’s third-biggest economy to Germany, raising doubts about when the country’s central bank will exit its decade-long ultra-loose monetary policy.
Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute, explains that the economy will continue to lack momentum with no key drivers of growth. The sluggishness in consumption and capital expenditure, key pillars of domestic demand, is particularly striking. Meanwhile, Britain’s economy slipped into a recession after reporting two back-to-back quarters of negative economic growth in the second half of 2023. Gross domestic product shrank by a worse-than-expected 0.3% in the fourth quarter of 2023.
Factors for Japan’s recession
The latest figures show that Japan’s GDP for 2023 was $4.2 trillion in dollar terms, compared to Germany’s $4.5 trillion.
The Bank of Japan’s negative interest rates contributed to Japan’s 18% slump against the dollar in 2022 and 2023, while Germany’s euro has remained stable against the dollar.
In contrast to other major central banks that have increased borrowing costs to combat skyrocketing inflation, the Bank of Japan had maintained negative interest rates to promote prices, which contributed to this.
The recent decline in the value of the yen has a significant role in the overtaking in terms of dollars.
Since 2019, the real GDP of Japan has surpassed that of Germany, according to economist Brian Coulton of Fitch Ratings.
Rising energy prices following Russia’s invasion of Ukraine have also put a special strain on Germany’s mainly export-dependent manufacturing.
Aside from budgetary instability and persistent labor shortages, other factors that have hurt the largest economy in Europe include interest rate hikes by the European Central Bank within the eurozone.
As it struggles with a weakening currency and an aging, declining population, Japan has fallen behind Germany as the third-largest economy in the world and entered a recession, according to figures released on Thursday.
With its GDP growing 1.9% in nominal terms (i.e., not adjusted for inflation) in 2023, Japan’s economy—which is now the fourth largest in the world—was worth $4.2 trillion in 2023, while Germany’s GDP was valued at $4.5 trillion.
Weakning yen
Besides, In 2022 and 2023, the value of the Japanese yen fell by about a fifth about the US dollar, with a 7% decline recorded last year.
Similar to Japan, Germany is resource-poor, its population is aging, and it depends mostly on exports. The largest economy in Europe has also been impacted by rising energy costs brought on by Russia’s conflict in Ukraine, rising interest rates inside the eurozone, and a persistent labor shortage. Although a weak yen has helped Japanese exporters, such as automakers, by lowering the cost of their goods abroad, the nation is facing a larger labor shortage than Germany and is having difficulty raising its low birthrate.