DGermany is once again the third strongest economic power in the world. The swap of places in the world rankings was predicted a few weeks ago, but now it is official: Japan, previously number three behind the USA and China, will have a gross domestic product (GDP) of 4.21 trillion in 2023 after two quarters of shrinking economic output dollars (3.9 trillion euros), as the government in Tokyo announced on Thursday. Germany came in at $4.46 trillion.
However, the rankings in dollars distort the true picture. Unlike the euro, the Japanese currency, the yen, has recently performed very weakly compared to the American currency. In fact, the Japanese economy grew by 1.9 percent for the year as a whole, while the German economy shrank by 0.3 percent.
Nevertheless, Japanese Minister for Economic Revival, Yoshitaka Shindo, warned on Thursday that the domestic economy must reposition itself. “The fact that Germany has overtaken Japan shows that we absolutely need to push forward with structural reforms and create a new phase of growth,” said the minister. The Japanese media also pointed out that Germany only has three quarters of the population of Japan.
Gross domestic product fell by 0.1 percent from October to December compared to the previous quarter, after having already shrunk in the previous quarter. If there are two negative quarters in a row, economists speak of a technical recession. The decline comes as a surprise. According to a survey, Japanese economists had expected growth of 1.1 percent.
High inflation leads to restrained consumption
Japanese consumption in particular was weaker than expected. Private consumption accounts for more than half of the island nation’s economic power and fell by 0.2 percent. It shrank for the third time in a row, as the government announced. The reason for this is probably the unusually high inflation for Japan, which has been causing real wages to fall for some time. Japan is also suffering from the fact that its population is aging and shrinking. One in six Japanese people is now over 75 years old. But corporate investment spending was also weak, falling by 0.1 percent.
The decline in economic output also comes as a surprise because many Japanese companies such as Toyota and the mechanical engineering company Komatsu recently reported record profits. The government in Tokyo has repeatedly pleaded with companies to noticeably increase wages in the current salary negotiations in order to cushion the loss of purchasing power among the Japanese population. The Bank of Japan (BOJ) is also betting that wages will now also rise after the high price increases of the past two years. Central bank Kazuo Ueda mentioned this several times as a prerequisite for getting out of the negative interest rate policy that is still ongoing in Japan.
“There is a risk that the economy will contract again in the January-March quarter due to slowing global growth, weak domestic demand and the impact of the New Year’s quake in western Japan,” Takuji Aida, chief economist at Credit Agricole, told Reuters. “The BOJ may be forced to sharply downgrade its rosy GDP forecasts for 2023 and 2024.”
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