Japan Slips to Fourth Largest Economy, Germany Moves to Number Three

February 16, 2024 | Investopaper

Japan slipped from its position as the world’s third-largest economy to the fourth spot in 2023, with Germany taking its place, as announced by the government on Thursday. This surprising shift was fueled by a recession in the final quarter of the previous year, primarily attributed to a decline in domestic demand.

During the October-December quarter, the Japanese economy contracted by 0.1%, equivalent to an annual rate of 0.4%. This contraction reflected a decrease in both household and business spending, signaling a lack of vitality amidst persistent inflation, according to the Cabinet Office. With two consecutive quarters of contraction officially labeling the economy as technically in a recession, the challenge for the government and the Bank of Japan lies in rejuvenating growth through increased domestic demand and rising wages.

Economists surveyed by the Japan Center for Economic Research had anticipated an annualized 1.28% expansion, making the unexpected negative growth and plummeting domestic demand a “negative surprise” for the markets, as described by Toru Suehiro, chief economist at Daiwa Securities Co.

Private consumption, constituting over half of the economy, declined by 0.2%, marking the third consecutive quarter of decrease. This was attributed to households grappling with the rising cost of living and falling real wages. Capital spending also exhibited fragility, decreasing by 0.1%, signifying a cautious approach among Japanese firms in expanding investments despite robust plans. Despite weakened domestic demand, exports continued to grow by 2.6%, supported by a resurgence of inbound tourism. However, public investment declined by 0.7% for the second consecutive quarter. On a yearly basis, Japan’s economy witnessed a real-term growth of 1.9% and a nominal growth of 5.7%.

Economy Revitalization Minister Yoshitaka Shindo emphasized the need for structural reforms and the creation of a new growth stage to support sustainable, demand-driven economic growth, despite the challenges faced.


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