A Japan in recession loses its place as the world's third largest economy, now occupied by Germany
Gone are the days when Japan’s economic superiority seemed inevitable, as it once appeared to be a contender for hegemony against the United States. Following its isolationist history and the humiliation of World War II, Japan quickly recovered and became a global powerhouse known for its speed and productivity. This economic transformation was famously referred to as the “Japanese economic miracle” in the early 1990s.
For a period of time, Japan held the title of the second-largest economy in the world. However, its position took a hit when China, amidst rapid and uncontrolled development, surpassed Japan to claim the spot. Now, Japan is facing a recession due to weak domestic consumption, inflation, and demographic challenges, causing it to lose its spot as the third-largest economy to Germany.
On Thursday, Tokyo announced that despite a 1.9% growth in 2023, its nominal GDP stood at $4.2 trillion, while Germany’s was estimated to be around $4.4 or $4.5 trillion, depending on the currency conversion.
The Japanese economy is burdened by the weakening yen, which has resulted in reduced export earnings. The currency experienced an 18% decline against the US dollar in 2022 and 2023, with a 7% depreciation last year alone.
High inflation has contributed to Japan’s economic decline, with authorities announcing that the country has entered a technical recession. The contraction in the fourth quarter of 2023, coupled with decreasing demand and domestic consumption, has led to a 0.4% decline compared to the same period in 2022 and a 0.1% decline compared to the previous quarter. Economy Minister Yoshitaka Shindo emphasized the urgent need for “solid wage growth” to support consumption, which has been lacking momentum due to rising prices.
Analysts in Tokyo suggest that while the Bank of Japan is expected to gradually reduce its extensive monetary stimulus this year, the weak data could cast doubt on the expectation that rising wages will boost consumption and sustain inflation at the 2% target.
Tetsuji Okazaki, a professor of economics at the University of Tokyo, argues that this weakening of Japan’s economy reflects a global trend of narrowing gaps between developed and emerging nations. Okazaki predicts that India will likely surpass Japan in nominal GDP within a few years.
What happened to the once-praised Japanese miracle? A prominent local economist named Aoki Masahiko coined the term “lost decades” to describe Japan’s struggle. After experiencing significant and sustained growth through technological advancements, capital accumulation, and improvements in labor quantity and quality from 1945 to 1991, Japan failed to deflate an inflated bubble, leading to a prolonged period of deflation and debt.