Germany will replace Japan as the world’s third largest economy in 2023

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Japan’s Symbolic Ranking as Third Largest Global Economy Threatened by Sharp Yen Decline

Published on: 15/02/2024 – 15:13

Japan is set to lose its symbolic title as the world‘s third largest economy by 2023, according to preliminary estimates of Japan’s gross domestic product (GDP) released on Thursday. The main reason cited for this shift is the sharp decline in the yen exchange rate.

AFP reports that Japan’s nominal GDP in 2023 is estimated to be around $4.2 trillion, while Germany’s is expected to reach $4.5 trillion. However, Japan’s real GDP growth accelerated last year by 1.9%, compared to Germany’s shrinkage of 0.3%.

Germany’s economic decline is attributed to factors such as weak external demand, rising energy costs for large manufacturing industries, and the European Central Bank (ECB) raising interest rates to control inflation. As a result, the International Monetary Fund (IMF) has indicated that Germany is likely to be surpassed by India in nominal GDP terms in the near future.

Economist Brian Coulton of Fitch Ratings predicts that India’s booming economy could surpass Japan and Germany as early as 2025, although India’s per capita GDP will still be significantly lower than that of Germany and Japan.

In response to the potential loss of its third place ranking, Japanese media have criticized the country for its declining growth potential, accelerated population decline, and long-term low productivity. Calls for economic reforms have intensified, with Japan’s Economic Revitalization Minister Yoshitaka Shindo emphasizing the need for structural reforms and wage growth in line with inflation.

The decline of Japan’s currency, the yen, is also a significant factor in its loss of economic ranking. In 2023, the yen fell by 7% against the US dollar, largely due to the contrasting monetary policies between the United States and Europe, and the Bank of Japan’s continued ultra-loose stance.

As Japan and Germany grapple with economic challenges, the global economic landscape is poised for a major shift, with India emerging as a potential powerhouse in the near future.