Germany has surpassed Japan to become the world's third-largest economy, while Japan has entered a recession due to challenges posed by a weak yen and an aging, shrinking population. In nominal terms, Japan's economy grew 1.9% in 2023, but its GDP in dollar terms amounted to $4.2 trillion compared to Germany's $4.5 trillion. The weakening of the yen against the dollar played a significant role in this shift, impacting export profits when earnings are repatriated. Germany, like Japan, faces resource scarcity, an aging population, and heavy reliance on exports. Rising energy prices, interest rates, and a shortage of skilled labor have also affected Germany's economy.
Although a weak yen has benefited Japanese exporters, the country faces a more severe labor shortage than Germany and struggles to address a low birthrate. Despite efforts to boost the birthrate, labor shortages are expected to worsen, even as the country welcomes more foreign workers. To address these challenges, the Japanese government aims to promote structural reforms, such as increasing female participation in full-time work and reducing barriers to foreign investment. The government also plans to support pay raises to stimulate demand-driven growth.
Recent data shows a contraction in Japan's real GDP, with weak household and business spending contributing to a decline in private consumption. The previous quarter's growth was also revised downward, indicating that Japan is in a technical recession. Japan's economic stagnation and deflation since the burst of its asset-inflated bubble economy in the early 1990s have led to its diminished presence in the global economy. Tetsuji Okazaki, an economics professor, notes that Japan's advantage in sectors like automobiles has been challenged by the rise of electric vehicles.
The loss of its third-place position to a struggling German economy will impact Japan's self-esteem and Prime Minister Fumio Kishida's popularity. Furthermore, the International Monetary Fund projects that India will overtake Japan in 2026, followed by Germany the following year, further diminishing Japan's ranking. The Nikkei newspaper has called for accelerated economic reforms in response to this wake-up call, as economists attribute Japan's predicament to its demographic crisis.