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Germany becomes third largest economy by overtaking Japan

Tokyo: once projected to become the world’s largest economy, Japan slipped down Germany India ranked fourth last year, although India is projected to leapfrog it by the end of the decade, official data on Thursday showed.
Despite 1.9 percent growth, Japan’s nominal 2023 GDP in dollar terms was $4.2 trillion, compared with $4.5 trillion for Germany, according to data released last month, government data showed.
Economists said the change in position mainly reflected the sharp decline in the yen against the dollar rather than the German economy – which is projected to shrink 0.3 percent in 2023 – outperforming Japan.
The Japanese currency is set to decline by nearly a fifth against the US currency in 2022 and 2023, including a decline of nearly seven percent last year.
This happened partly because the Bank of Japan has maintained negative interest rates in an effort to boost prices, unlike other major central banks that have raised borrowing costs to fight rising inflation.
“The reason for the size lead in dollar terms is the recent decline in the yen. Japan’s real GDP has actually outperformed Germany since 2019,” said Fitch Ratings economist Brian Coulton.
Germany’s highly export-dependent manufacturers have been particularly hard hit by rising energy prices following Russia’s attack on Ukraine.
Europe’s largest economy has been hampered by the European Central Bank raising interest rates in the eurozone, as well as uncertainty over its budget and a chronic shortage of skilled labor.
Japan is also heavily dependent on exports, particularly cars, although the weak yen – making exports cheaper – has helped big companies like Toyota offset weakness in key markets such as China.
But it is suffering more than Germany in terms of labor shortages as its population has declined and the birth rate remains low, and economists expect the gap between the two economies to widen.
Data on Thursday showed Japan’s economy shrank an adjusted 0.1 percent quarter-on-quarter in the last three months of 2023, missing market expectations of 0.2 percent growth.
Third-quarter growth was also revised down to negative 0.8 percent, meaning Japan was in technical recession in the second half of 2023.
“Like Japan, Germany’s population is declining, but it has still achieved stable economic growth,” said Toshihiro Nagahama, an economist at Dai-ichi Life Research Institute.
“This is because, especially since the 2000s, government officials in Germany have been actively implementing policies to create an environment that makes it easier for companies to operate in the country,” he said.
During its boom years of the 1970s and 80s, some predicted that Japan would become the world’s largest economy.
But the disastrous burst of Japan’s asset bubble in the early 1990s led to several “lost decades” of economic stagnation and deflation.
When Japan overtook Asian rival China into second place in 2010 – whose economy is now almost four times larger – it prompted great introspection.
Although this is largely the result of the yen’s decline, falling behind Germany would still be a blow to Japan’s self-esteem and increase pressure on unpopular Prime Minister Fumio Kishida.
There’s more to be added insult to injury, with India projected to overtake Japan in 2026 and Germany in 2027 in terms of output – though not in per capita GDP, according to the International Monetary Fund.
Natixis economist Alicia Garcia-Herrero said, “Germany and Japan are shrinking in terms of contribution to global growth in favor of fast-growing countries… because their productivity is already very high and very difficult to increase.” “
“Of course, both Germany and Japan can take measures to reduce it. The most obvious solution is to allow more immigration or increase the fertility rate,” he told AFP.
“Japan has not made progress in increasing its growth potential,” Japanese financial daily Nikkei said in a recent editorial.
“This situation should be taken as a warning to accelerate neglected economic reforms.”

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