Germany now world’s third largest economy as Japan loses its spot

Japan’s economy is now the world’s fourth-largest after it contracted in the last quarter of 2023 and fell behind Germany.

The government reported the economy shrank at an annual rate of 0.4% in October to December, according to Cabinet Office data on real GDP, though it grew 1.9% for all of 2023.

It contracted 2.9% in July-September. Two straight quarters of contraction are considered an indicator an economy is in a technical recession.

Japan’s economy was the second largest until 2010, when it was overtaken by China’s. Japan’s nominal GDP totaled $4.2 trillion last year, while Germany’s was $4.4 trillion, or $4.5 trillion, depending on the currency conversion.

What’s behind Japan’s economic decline?
A weaker Japanese yen was a key factor in the drop to fourth place, since comparisons of nominal GDP are in dollar terms.

On Tuesday evening, Japanese officials attempted to come to the yen’s defence. However, stern warnings proved ineffective, for now.

“Japan’s top currency diplomat Masato Kanda communicated his displeasure around rapid yen moves which he says could have an adverse effect on the economy. Mr Kanda even went as far as to suggest deploying FX intervention as a potential solution to the matter,” Richard Snow, a market strategist at DailyFX, said.

“Japanese officials previously intervened in the FX market in September and October 2022 when it sold dollars and bought yen to strengthen the value of the local currency. It is reported that nearly $20 billion was deployed in an effort to strengthen the yen – which it ultimately did. It was the first dollar, yen intervention in 24 years and it could soon be upon us again should Tokyo tire of repeated warnings,” the analyst added.

Meanwhile, the Japanese Finance Minister, Shun’ichi Suzuki, reiterated the importance for currencies to move stably and reflect fundamentals and said he is watching FX (currency) moves with a strong sense of urgency.

Japan’s relative weakness also reflects a decline in its population and lagging productivity and competitiveness, economists say.

Germany dealing with own economic woes
Meanwhile, Europe’s economic powerhouse faces challenges of its own, market analyst, Piero Cingari, highlights.

“Germany’s economic sentiment indicators remain disconcerting, with January figures hitting lows not seen since the COVID-19 crisis, suggesting weak economic activity for the first half of 2024,” he said.

After a 0.3% contraction in output in 2023, the German economy is only expected to see a modest increase of 0.3% in 2024, a downward revision from the 0.8% previously forecasted in autumn. The projection for 2025 remains constant at a growth of 1.2%.

Cingari also noted that labour shortages represent a bottleneck to economic activity, while a trade-driven recovery is also unlikely amid stagnating export and import dynamics.

“On a more optimistic note, market financing conditions have eased recently, with expectations of continued relief facilitated by more accessible bank lending,” he said.

(Source: Euronews)