Japan Drops to Fourth Largest Economy as GDP Shrinks, Germany Claims Third Spot

Japan unexpectedly entered a recession at the end of last year, losing its place as the world’s third-largest economy to Germany and raising worries about when the central bank would start to ease its decade-long ultra-loose monetary policy.

According to analysts, the move in positions is mostly owing to the sharp decrease in the yen’s value against the dollar, rather than the German economy, which shrank by 0.3% in 2023, beating Japan.

In 2022 and 2023, the Japanese yen plummeted by more than a fifth against the US dollar, including almost 7% last year.

Japan’s economy was the world’s second-largest until 2010 when China surpassed it. Last year, Japan’s nominal GDP was $4.2 trillion, whereas Germany’s was $4.4 trillion (or $4.5 trillion depending on currency conversion).

While many analysts still expect the Bank of Japan to decrease its massive monetary stimulus this year, the poor numbers may call into doubt the bank’s prediction that rising salaries will sustain consumption and keep inflation around its 2% goal for the near future.

“Two consecutive declines in GDP and three consecutive declines in domestic demand are bad news, even if revisions may change the final numbers on the margin,” said Stephan Angrick, senior economist at Moody’s Analytics.

“This makes it harder for the central bank to justify a rate hike, let alone a series of hikes.”

Yoshitaka Shindo, the economy minister, emphasized the need for strong wage growth to support consumption, which he described as “lacking momentum” owing to rising costs.

Japan has long been seen as “an economic miracle,” emerging from the ashes of WWII to become the world’s second-largest economy after the United States. This continued until the 1970s and 1980s. However, for most of the previous 30 years, the economy has developed only marginally, primarily languishing in the doldrums since the bursting of its financial bubble in 1990.

Britain’s economy also declined late last year. Britain said on Thursday that its economy entered a technical recession in October-December, contracting by 0.3% from the previous quarter. The quarterly reduction follows a 0.1% decrease in the preceding three months.