Japan is falling behind Germany

Japan is also in recession. Because the yen is so weak, the country is falling down in the ranking of the largest economies – which means Germany is now in third place. But the domestic economic crisis also continues.

Japan loses third place among the world’s largest economies, falling behind Germany. In the fourth and final quarter of last year, Japan slipped into recession due to weak domestic demand. It is the second quarter in a row with a negative sign for gross domestic product (GDP).

The government in Tokyo announced today that nominal economic output in 2023 amounted to 4.21 trillion dollars (3.9 trillion euros). This means that Japan is now only number four in the world economy after Germany with $4.46 trillion. The United States is at the top, well ahead of China in third place.

Weak yen weighs on

According to the government, Japan’s decline is mainly due to the sharp fall in the value of the yen. Economists see it similarly: “The shift in ranking is exclusively linked to the exchange rates and is therefore purely a snapshot. The statement that Germany is overtaking Japan indicates a new real economic assessment – but that cannot be deduced from the data,” explains Thomas Theobald, Economic and financial market expert at the Institute for Macroeconomics and Economic Research (IMK), opposite tagesschau.de.

In the October to December quarter, Japan’s economy shrank by 0.1 percent compared to the previous quarter, the second quarter in a row. With two negative quarters in a row, economists are talking about a technical recession.

In Japan, consumers held back their spending before the turn of the year, which was particularly felt by clothing stores and restaurants. Some experts expect a further decline in economic output in the current quarter, as weak demand in China, weak consumption and production stops at car manufacturer Toyota are likely to slow the economy.

Structural problems in Germany and Japan

A comparison of the two economies of Germany and Japan is obvious. Most recently, the German gross domestic product shrank by 0.3 percent in the fourth quarter of 2023, due, among other things, to falling investments in buildings and equipment such as machines.

Current economic data has tended to be weak recently, and economic institutes and the federal government have revised their economic forecasts downwards. Commerzbank chief economist Jörg Krämer therefore expects the German economy to also shrink in the current first quarter. If that were the case, there would also be talk of a technical recession in Germany.

In view of the German economic downturn, the EU Commission again lowered its growth forecast for the European Union today. The authority now assumes that the EU countries will only achieve growth of 0.9 percent this year. The Commission is forecasting mini-growth of 0.3 percent for Germany.

Germany has a structural problem and is caught in stagnation, said Clemens Fuest, President of the ifo Institute, today tagesschau24. Fuest also referred to demographic change and a shrinking working population in this country. In addition, one of the most important German sectors, the automotive industry, is in a process of change.

Similar Business models

There are some parallels in economic structures and business models in Germany and Japan. “Both economies have a similar effect, because both Germany and Japan, as export nations, are suffering from the global economic weakness,” says IMK expert Theobald.

Demographic change is also having a negative impact in Japan. According to Theobald, the demographic factor plays a role in both economies. “But in Japan, firstly, the demographic development has been declining for a long time. Secondly, the problem is much more pronounced there. The aging of society can lead to a relative weakening of consumption, as there is a motive to save for old age.” And just like in Germany, key industries such as mechanical engineering and the automotive industry are particularly important in Japan.

In Germany it is still uncertain whether a technical recession will actually occur. In Japan, there is “risk that the economy will contract again in the January-March quarter due to slowing global growth, weak domestic demand and the impact of the New Year’s quake in western Japan,” said Takuji Aida, chief economist at Credit Agricole.