Situated in the heart of Asia, Tokyo, the capital city of Japan, experienced a significant economic downturn in the last quarter of 2003. This resulted in the country entering into a recession and subsequently dropping to fourth place in the ranking of the world’s largest economies by the year 2023. This shift in ranking placed Japan behind Germany, a nation known for its strong industrial sector and robust economy.
The Japanese economy saw a contraction at an annual rate of 0.4 percent during the October-December period of 2023. This followed a decline of 0.8 percent in the preceding quarter, signifying a consistent downward trend in the economic performance of this Pacific nation.
The Real Gross Domestic Product (GDP) of Japan, which serves as a measure of the total value of all goods and services produced within the country, shrank by 0.1 percent in comparison to the previous quarter. This followed the 0.8 percent decline witnessed in the third quarter of the same year, according to preliminary government data. As a result, Japan’s economy registered a contraction for two consecutive quarters, a situation that is technically classified as a recession.
Private consumption, which accounts for over half of Japan’s GDP, also took a hit, falling by 0.2 percent in the October-December period. This marked the third consecutive quarter of decline for this economic indicator, as inflation continued to rise and wages continued to shrink.
Business investment also took a downturn, contracting 0.1 percent. On the other hand, imports, which negatively affect GDP when they increase, rose by 1.7 percent. Exports, however, experienced growth, increasing by 2.6 percent. Japan is heavily reliant on foreign trade, with a particular emphasis on car exports. Despite the weak yen making Japanese products cheaper abroad, this has proven beneficial for companies like Toyota, especially in challenging markets such as China.
Alarm signal
The year 2023 marked a significant shift in global economic rankings as Japan ceded its position as the world’s third largest economy to Germany. This decline was primarily attributed to the severe devaluation of the yen. The shift was more a result of fluctuations in currency values rather than the economic performance of the two countries.
In 2023, Japan’s economy grew by 1.9 percent, while Germany’s contracted by 0.3 percent. However, the drastic depreciation of the yen – by over 18 percent against the dollar in the last two years – brought Japan’s nominal GDP down to 4.2 trillion dollars. This is below Germany’s GDP, which stood at 4.5 billion dollars.
The fall of the yen can be attributed to the decision by the central bank to maintain negative interest rates in order to stimulate price increases, while other countries raised their rates to combat inflation.
The situation underscores the gradual loss of competitiveness in the Japanese economy, which has been compounded by a shrinking population due to aging and a lower birth rate.
During the economic boom years of the 1970s and 1980s, Japan was projected to overtake the United States as the world’s largest economy. However, the bursting of its financial and real estate bubble in the early 1990s resulted in several “lost decades” of economic stagnation and deflation, which is characterized by a constant fall in prices.
In 2010, Japan was displaced by China as the second largest economy in the world, falling to third place. Currently, China’s economy is four times larger than Japan’s. Moreover, Japan’s new fourth place ranking is under threat from the rapidly growing Indian economy.
