Germany overtakes Japan to become the world's third-largest economy

(Patria) - Japan has fallen below Germany in the ranking of the world's largest economies, official data showed on Thursday, with India projected to overtake both in a few years, AFP reported.

Despite growing 1.9 percent, Japan's nominal gross domestic product in 2023 in dollar terms was $4.2 trillion, government data showed, compared to $4.5 trillion for Germany, according to figures released last month.

The change in positions primarily reflects the sharp fall of the yen against the dollar, rather than the German economy, which contracted 0.3 percent in 2023, outperforming Japan, economists say. The Japanese currency weakened by nearly a fifth in 2022 and 2023 against the US dollar, including about seven percent last year.

This is partly because, in an effort to boost prices, the Bank of Japan has maintained negative interest rates, unlike other major central banks that have raised borrowing costs to combat rising inflation.

German manufacturers, who are heavily dependent on exports, have been particularly hit by the surge in energy prices following Russia's invasion of Ukraine. Europe's largest economy has also been hampered by the European Central Bank's interest rate hikes in the eurozone, as well as uncertainty surrounding its budget and a chronic shortage of skilled labor.

Japan also relies heavily on exports, especially automobiles, although the weak yen, which makes exports cheaper, has helped large companies like Toyota offset weakness in key markets like China. But Japan suffers more than Germany in terms of labor shortages as its population declines and birth rates remain low, so economists expect the gap between the two economies to widen.

Data from Thursday showed that the Japanese economy contracted 0.1 percent on a quarterly basis in the last three months of 2023, missing market expectations of 0.2 percent growth. Growth in the third quarter was also revised down to negative 0.8 percent, meaning Japan was in technical recession in the second half of 2023.

During its boom years of the 1970s and 80s, some predicted Japan would become the world's largest economy. However, the catastrophic bursting of Japan's asset bubble in the early 1990s led to several "lost decades" of economic stagnation and deflation. When Japan was overtaken by China in 2010, whose economy is now about four times larger, it caused a major reassessment.

Further humiliation comes with India, which is projected to overtake Japan in 2026 and Germany in 2027 in terms of output, though not in GDP per capita, according to the International Monetary Fund.