Said El Mansour Cherkaoui – info@triconsultingkyoto.com
Said El Mansour Cherkaoui February 17, 2024
Japan’s economy is now the world’s fourth-largest after it contracted in the last quarter of 2023 slips into a recession and lost its spot as the world’s third-largest economy that is taken now by Germany.
Japan, once poised to become the world’s largest economy, fell to fourth place behind Germany last year, according to official data released February 15, 2024. Japan’s nominal GDP grew by 1.9% in 2023 to $4.2 trillion, a sharp decline in the yen’s value against the dollar played a significant role in this shift.
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 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 outperformed Germany’s since 2019,” said Fitch Ratings economist Brian Coulton.
Germany’s heavily export-dependent 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 labor.
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. Source
Some analysts are warning of another contraction in the current quarter as weak demand in China, sluggish consumption and production halts at a unit of Toyota Motor Corp (7203.T), opens new tab all point to a challenging path to an economic recovery.
Japan’s economy was the world’s third-largest in 2022, with $4.26 trillion in nominal GDP, which compares with $25.44 trillion for the United States, or a quarter of the global economy, and $17.96 trillion for China. Japan accounted for a record-low 4.2% of global GDP, down from 5.1% the year earlier. [Dec 25, 2023]. Japan is now the world’s Fourth-largest after contracting in 2023 and falling behind Germany.
Japan’s economy shrank by 0.4% annually from October to December 2023. In 2023, Japan’s nominal GDP grew by 1.9% to $4.2 trillion, but the sharp decline in the value of the yen against the dollar has contributed to this shift. Economists say Japan’s relative weakness also reflects a decline in its population and lagging productivity and competitiveness.
Other economic challenges facing Japan include:
- Supply chain issues
- Rising labor costs
- Political issues
- A low birthrate and aging population
- A strained social security system
- Labor shortages
Japan’s recovery is struggling to gain momentum. Real GDP contracted in the third quarter as inflation eroded purchasing power. Real domestic consumer spending fell 0.3%—the second consecutive contraction.
The economy shrank 2.9% on an annualized basis in the third quarter compared with the 2.1% contraction recorded in the preliminary estimate. TOKYO—Japan’s economy contracted at a faster pace than initially estimated in the July-September quarter due to weak consumer spending, revised government data showed Friday. Dec 7, 2023
Economic contraction as inflation hits hard The real GDP growth rate in the July-September quarter of 2023, announced on November 15, fell into the negative at -0.5% from the previous quarter (annualized growth rate of -2.1%), the first contraction in three quarters. Dec 12, 2023
The fiscal 2024 economic growth projection is slightly higher than the previous estimate of 1.2%. Domestic demand is expected to rebound in the next fiscal year with the help of planned income tax cuts on top of the ongoing trend of wage hikes, a Cabinet Office official said. Dec 21, 2023
Japan faces both cyclical and structural challenges as it begins the new year. Its cyclical challenges are global supply chain bottlenecks and labour market frictions, which continue to put downward pressure on its economy as it strives to recover from the worldwide recession. Jan 18, 2023
As of February 14, 2024, Japan’s GDP contracted by 0.4% in the last three months of 2023, compared to a 3.3% contraction in the previous quarter. This unexpected contraction is due to weak domestic consumption, such as weak spending by households and businesses.
Japan’s economy contracted at a 2.1% annual pace in July-September as consumption and investment weakened, the government said Wednesday. Nov 15, 2023
The Recession Indicator for Japan in September 2023, compiled by the Japan Center for Economic Research (JCER), was 56.5%, up from the previous month by 3.3 pts (retroactively revised basis, Figure 1). The indicator had been below the warning level (67%) six months in a row. Nov 9, 2023
Some of the biggest problems facing Japan include: Aging population: Japan has one of the oldest populations in the world, with a large number of elderly citizens and a low birth rate. This can lead to a shortage of workers and increased costs for social welfare programs such as healthcare and pensions. Jan 22, 2023
Japan’s major export industries include automobiles, consumer electronics (see Electronics industry in Japan), computers, semiconductors, copper, and iron and steel. Additional key industries in Japan’s economy are petrochemicals, pharmaceuticals, bioindustry, shipbuilding, aerospace, textiles, and processed foods.
Around 70% of Japanese government bonds are purchased by the Bank of Japan, and much of the remainder is purchased by Japanese banks and trust funds, which largely insulates the prices and yields of such bonds from the effects of the global bond market and reduces their sensitivity to credit rating changes.
Recently, Japan has been reporting a trade deficit, meaning the value of its imports exceeds the value of its exports. Most of these imports have come from China and the United States. The trade deficit is one of the causes for in an increase of the national debt.Nov 30, 2023
According to Global Data, the manufacturing industry contributes around 89% to the Japanese GDP, and the automotive industry contributes the most to the manufacturing industry. The Japanese automotive industry has a long history of innovation and has been at the forefront of the development of new technologies.Feb 12, 2023
Leading domestic companies in Japan 2024, by market capitalization. Toyota Motor Corporation was the leading domestic company in Japan based on market capitalization, which amounted to around 48.9 trillion Japanese yen in January 2024. Feb 1, 2024
China and Japan are the largest foreign investors in American government debt. Together they own $2 trillion — more than a quarter — of the $7.6 trillion in US Treasury securities held by foreign countries. May 25, 2023
| Economy of Japan Tokyo, the financial center of Japan | |
| Currency | Japanese yen (JPY, ¥) |
|---|---|
| Fiscal year | 1 April – May |
| Trade organizations | APEC, WTO, CPTPP, RCEP, OECD, G-20, G7 and others |
| Country group | Developed/Advanced [1] High-income economy [2] |
| Statistics | |
| Population |  122,631,432 (2024) [3] |
| GDP | $4.230 trillion (nominal; 2023)[4] $6.457 trillion (PPP; 2023)[4] |
| GDP rank | 4th (nominal; 2023) 4th (PPP; 2023) |
| GDP growth | 1.1% (2022) [5] 1.3% (2023f) [5] 1.0% (2024f) [5] |
| GDP per capita | $33,950 (nominal; 2023)[4] $52,120 (PPP; 2023)[4] |
| GDP per capita rank | 30th (nominal; 2023) 34th (PPP; 2023) |
| GDP by sector | Agriculture: 1.1% Industry: 30.1% Services: 68.7%(2017 est.)[6] |
| GDP by component | Household consumption: 55.5%Government consumption: 19.6%Investment in fixed capital: 24%Investment in inventories: 0%Exports of goods and services: 17.7%Imports of goods and services: −16.8%(2017 est.) [6] |
| Inflation (CPI) | 3.1% |
| Population below poverty line | 0.7% on less than $1.90/day (2013) [7] 0.9% on less than $3.20/day (2013)[8] 1.2% on less than $5.50/day (2013)[9] |
| Gini coefficient | 33.9 medium (2015)[10] |
| Human Development Index | 0.925 very high (2021)[11] (19th) 0.850 very high IHDI (16th) (2021)[12] |
| Labor force | 69.1 million (May 2023) [13] 61.2% employment rate (May 2023) [14] |
| Labor force by occupation | Agriculture: 3% Industry: 25% Services: 72% (FY 2018) [15] |
| Unemployment |  2.6% (2023) [13] 3.7% youth unemployment (15 to 24 year-olds; May 2023) [13] 1.8 million unemployed (May 2023) [13] |
| Average gross salary | ¥429,501 / $3,267.16 monthly [16] (2022) |
| Average net salary | ¥333,704 / $2,538.45 monthly [17] [18] (2022) |
| Main industries | Motor vehicles Electronics machine tools steel nonferrous metals ships chemicals textiles processed foods |
| External | |
| Exports | $717.94 billion (2023) [19] |
| Export goods | Transport Equipment 21.0% Machinery 19.9% Electrical Machinery 18.7% Chemicals 12.4% Manufactured Goods 10.4% Raw Materials 1.7% Foodstuff 1.3% Mineral Fuels 0.8% Others: 13.8% [19] |
| Main export partners |  China 22.1%  Hong Kong 4.5%  United States 20.0%  ASEAN 14.6%  European Union 10.3%  South Korea 6.5%  Taiwan 5.9%  Australia 2.3%  India 2.2% (2023) [19] |
| Imports | $784.06 billion (2023)[19] |
| Import goods | Electrical Machinery 17.6% Mineral Fuels 16.6% Machinery 10.5% Foodstuff 9.9% Chemicals 9.9% Manufactured Goods 9.3% Raw Materials 6.9% Transport Equipment 5.0% Others: 14.4% [19] |
| Main import partners | China 22.3% Hong Kong 0.2% ASEAN 15.4% United States 10.5% European Union 10.2% Australia 8.3% United Arab Emirates 4.7% Taiwan 4.5%  Saudi Arabia 4.4% South Korea 4.0%(2023) [19] |
| FDI stock | Inward: $25 billion (2021)[20] Outward: $147 billion (2021)[20] |
| Current account | $58.108 billion (2022)[21] |
| Gross external debt |  $4.54 trillion (March 2023)[22](103.2% of GDP) |
| Public finances | |
| Government debt | ¥1.457 quadrillion 263.9% of GDP (2022)[21] |
| Budget balance | 1.35% of GDP (2022 est.)[21] |
| Revenues | ¥196,214 billion[21] 35.5% of GDP (2022)[21] |
| Expenses | ¥239,694 billion[21] 43.4% of GDP (2022)[21] |
| Economic aid | donor: ODA, $10.37 billion (2016)[23] |
| Credit rating | Standard & Poor’s: [24][25]A+ (Domestic)A+ (Foreign)AA+ (T&C Assessment)Outlook: Stable Moody’s:[25]A1Outlook: Stable Fitch:[25]AOutlook: Stable |
| Foreign reserves | $1.2 trillion (2023)[26] |
| Main data source: CIA World Fact Book All values, unless otherwise stated, are in US dollars. | |
Challenges and Solutions
Immigration is one option for solving Japan’s labor shortage problem, but the country has been relatively unaccepting of foreign labor, except for temporary stays, prompting criticism about discrimination and a lack of diversity.
Robotics, another option, are gradually being deployed but not to the extent they can fully make up for the lack of workers.
Another key factor behind Japan’s sluggish growth is stagnating wages that have left households reluctant to spend. At the same time, businesses have invested heavily in faster-growing economies overseas instead of in the aging and shrinking home market.
Private consumption fell for three straight quarters last year and “growth is set to remain sluggish this year as the household savings rate has turned negative,” Marcel Thieliant of Capital Economics said in a commentary. “Our forecast is that GDP growth will slow from 1.9% in 2023 to around 0.5% this year.”
Said El Mansour Cherkaoui – info@triconsultingkyoto.com
Said El Mansour Cherkaoui February 17, 2024
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Said Cherkaoui 24 
