Japan slid into recession: no longer the third largest economy

Japan’s economy contracted unexpectedly due to weak domestic consumption, pushing the country into recession and causing it to lose its position as the world’s third-largest economy to Germany.

Gross domestic product contracted at an annual rate of 0.4% in the final three months of 2023, the Cabinet Office reported Thursday, following a contraction in the previous quarter, CNN reported. A recession is generally defined as two consecutive quarters of economic contraction.

Data confirms that Japan’s economy was the world’s fourth-largest in dollar terms last year after Germany.

Private consumption, which accounts for half the economy, fell 0.2% as Japanese consumers struggled with rising prices for food, fuel and other goods.

Japan imports 94% of its basic energy needs and 63% of its food, so a weak yen significantly raises the cost of living, Neil Newman, a Japanmacro strategist in Tokyo, told CNN.

“Private consumption was particularly weak and the market expected it to remain flat,” he said. “Unfortunately, the situation will worsen in January after the earthquake in the Sea of ​​Japan. People stop spending during natural disasters.”

Japan’s economy, now the world’s fourth largest, grew 1.9% in 2023 in nominal terms – meaning it is not adjusted for inflation – but in dollar terms its gross domestic product (GDP) amounted to 4.2 trillion dollars compared to 4.5 trillion dollars for Germany, notes The Guardian.

The shift, more than a decade after the country lost second place to China, is attributed to the sharp decline in the yen’s value against the dollar over the past two years. A weaker yen eats into export gains as earnings are repatriated. The Japanese currency has fallen by nearly a fifth against the US dollar in 2022 and 2023, including a 7% fall last year.

Like Japan, Germany is resource poor, has an aging population and is heavily dependent on exports. Europe’s largest economy has also been hit by rising energy prices caused by the conflict in Ukraine, rising interest rates in the eurozone and chronic shortages of skilled labor.

While Japanese automakers and other exporters have benefited from a weak yen, which makes their goods cheaper on the international market, the country has a labor shortage worse than Germany and is struggling to cope with a low birth rate.

The failure of the Japanese government’s attempts to boost the birth rate means chronic labor shortages are expected to worsen even as the country welcomes record numbers of foreign workers.

Economic Revitalization Minister Yoshitaka Shindo told reporters that Germany’s overtaking of Japan showed it was “crucial” to push through structural reforms, including getting more women into full-time work and lowering barriers to foreign investment.

“We will take all political steps to support wage increases” to stimulate demand-driven growth, Shindo promises, Kyodo news agency reported.

Data released on Thursday showed real GDP – the total value of goods and services – contracted 0.1% in the final three months of 2023 from the previous quarter due to weak spending by households and businesses, according to Cabinet Office data.

Private consumption, which accounts for more than half of all economic activity in Japan, fell 0.2% as households struggled with rising living costs and falling real wages.

Growth for the previous quarter was also revised down to -0.8%, meaning Japan is in a technical recession, usually defined as contraction for two consecutive quarters.

During the boom years of the 1970s and ’80s, some predicted that Japan would overtake the United States as the world’s largest economy thanks to its cheap, high-quality exports of cars and consumer electronics.

Instead, the bursting of Japan’s asset-inflated bubble in the early 1990s ushered in several “lost decades” of economic stagnation and deflation.

The latest data reflects the reality of a weaker Japan, which can expect to have a smaller presence in the global economy, said Tetsuji Okazaki, an economics professor at the University of Tokyo. “A few years ago, Japan, for example, boasted a strong automotive sector. But with the advent of electric vehicles, even this advantage has eroded,” he said.

In 2010, China’s newly acquired status as the world’s second-largest economy triggered a wave of soul-searching in Japan about its ability to keep pace with emerging economies.

While Japan’s recent fall to fourth place has been attributed to sharp currency fluctuations, losing third place to Germany’s troubled economy would be a blow to its self-esteem and to already unpopular Prime Minister Fumio Kishida.

And the fall is unlikely to end there. India’s economy, fueled by a large and growing young population, is projected to overtake Japan in 2026 and Germany next year, according to the International Monetary Fund.

Business newspaper Nikkei said in a recent editorial that Japan has failed to boost its growth potential, a quandary that economists attribute to a demographic crisis.

“This situation should be taken as a wake-up call to accelerate neglected economic reforms,” the Nikkei report said.