Once forecast to become the world's biggest economy, Japan slipped below Germany last year to fourth place, official data showed Thursday, although India is projected to leapfrog both later this decade.
Despite growing 1.9 percent, Japan's nominal 2023 gross domestic product in dollar terms was $4.2 trillion, government data showed, compared with $4.5 trillion for Germany, according to figures released there last month.
The change in positions primarily reflects the sharp fall in the yen against the dollar, rather than the German economy -- which contracted 0.3 percent in 2023 -- outperforming Japan, economists said.
The Japanese currency slumped by almost a fifth in 2022 and 2023 against the US currency, including around seven percent last year.
This was in part because in an effort to boost prices the Bank of Japan has maintained negative interest rates, unlike other major central banks which have raised borrowing costs to fight soaring inflation.
"The overtaking... in size in dollar terms owes a lot to the recent collapse in the yen. Japan's real GDP has actually outperformed Germany's since 2019," said Fitch Ratings economist Brian Coulton.
Germany's heavily export-dependant manufacturers have been hit particularly hard by soaring energy prices in the wake of Russia's invasion of Ukraine.
Europe's biggest economy has also been hampered by the European Central Bank raising interest rates in the eurozone as well as uncertainty over its budget and chronic shortages of skilled labour.
Falling population
Japan is also heavily reliant on exports, in particular cars, although the weak yen -- making exports cheaper -- has helped big firms like Toyota offset weakness in key markets such as China.
But it is suffering more than Germany in terms of worker shortages as its population falls and birth rates remain low, and economists expect the gap between the two economies to widen.
Thursday's data showed that Japan's economy shrank an adjusted 0.1 percent quarter-on-quarter in the last three months of 2023, missing market expectations of 0.2 percent growth.
Growth for the third quarter was also revised downward to negative 0.8 percent, meaning that Japan was in technical recession in the second half of 2023.
"Like Japan, Germany's population has been declining, but it has nevertheless achieved steady economic growth," said Toshihiro Nagahama, economist at Dai-ichi Life Research Institute.
"This is because, especially since the 2000s, the government authorities in Germany have been actively implementing policies to create an environment that makes it easier for companies to operate in the country," he said.
Soul-searching
During its boom years of the 1970s and '80s some projected that Japan would become the world's biggest economy.
But the catastrophic bursting of Japan's asset bubble in the early 1990s led to several "lost decades" of economic stagnation and deflation.
When in 2010 Japan was overtaken as number two by Asian rival China -- whose economy is now around four times larger -- it prompted major soul-searching.
While largely a product of the yen's slide, falling behind Germany will still be a blow to Japan's self-esteem and add to the pressure on unpopular Prime Minister Fumio Kishida.
More humiliation is to come with booming India projected to overtake Japan in 2026 and Germany in 2027 in terms of output -- although not in GDP per capita -- according to the International Monetary Fund.
Germany and Japan "are shrinking in terms of contribution to global growth in favour of faster-growing ones... because their productivity is already very high and it is very hard to increase it," said Natixis economist Alicia Garcia-Herrero.
"Of course, both Germany and Japan could take measures to mitigate this. The most obvious one is allowing for more immigration or increasing the fertility rate," she told AFP.
Japan "has not made progress in raising its own growth potential," Japanese financial daily the Nikkei said in a recent editorial.
"This situation should be taken as a wake-up call to accelerate neglected economic reforms."
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)
