Japan enters recession, relinquishes position as world’s third-largest economy to Germany

Japan enters recession, relinquishes position as world’s third-largest economy to Germany

Japan’s economy experienced a decline for the second consecutive quarter from October to December, marking its entry into a technical recession and resulting in its displacement as the world’s third-largest economy by Germany, according to GDP data released on Thursday.

The Japanese government’s Cabinet Office reported that the GDP for the fourth quarter contracted by 0.4% on an annualized basis, following a 3.3% drop in the preceding July to September quarter.

While the figures for October to December are subject to potential revisions, the consecutive quarterly decline in GDP meets the standard definition of an economic recession.

Economist Neil Newman noted that Japan’s economy in 2023 amounted to $4.2 trillion, trailing behind Germany’s $4.4 trillion GDP for the same period.

However, Japan’s demotion to the fourth position among global economic powerhouses, behind Germany, China, and the United States, was not solely due to Germany’s economic growth. Japan’s economy also struggled in 2023, experiencing a 0.3% contraction attributed to factors such as increased interest rates and weakened domestic and foreign demand, according to the Federal Statistic Office.

This reshuffling aligns with a prediction by the International Monetary Fund made in October, anticipating Germany’s overtaking of Japan in third place in dollar terms.

The valuation of GDP in U.S. dollars is significant due to the notable depreciation of the Japanese yen against the dollar throughout 2023, with a decline of approximately 9%. Despite yen depreciation, which typically stimulates Japanese exports by making them cheaper in foreign markets, Japan’s nominal GDP experienced growth of 0.3% in the fourth quarter and 5.7% for the entire calendar year of 2023. Notably, nominal GDP differs from real GDP as it is not adjusted for inflation.

The market’s response to the news was positive, with the Nikkei 225 Index surging 461 points to a five-year high, closing Thursday’s trading session at 38,187. This surge followed a brief breach of the 38,000 level on Tuesday, marking the first time since Japan’s property crash in 1990.

Investors appeared confident, possibly influenced by the weak economic data signaling that Japan’s central bank is unlikely to abandon its negative (-0.1%) interest rate policy in the near future.

The recent reshuffle in the global economic hierarchy represents a significant shift, reminiscent of the transition in 2010 when China surpassed Japan as the world’s second-largest economy, having previously overtaken Germany for the third spot in 2007.