Japan is at risk of losing 3rd place to Germany, revealing a formidable "rival" that is trying to usurp the throne.

The latest figures on Japan's economic growth are set to confirm that the country has slipped from third place to fourth in the world in 2023, weighed down by a weak currency and an aging population.

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The latest figures on Japan's economic growth are being calculated to confirm that the country has lost its third place in the world . (Source: Kyodo)

While the economy is seen returning to average annual growth of 1.2% in the fourth quarter of 2024 after a sharp slowdown in the summer, figures for the year are almost certain to show Japan's GDP falling behind Germany's in dollar terms.

Japan’s fall in the rankings will raise new questions at home about the country’s direction. Public reaction to Japanese policymakers has been less severe than when China’s economy overtook Japan’s in 2010 and is on track to be four times larger today.

One reason is the public perception that the economy is suffering from major currency swings. Other factors include the poor state of the German economy and signs of a new dawn in Japan, with stock markets soaring and the central bank poised to raise interest rates for the first time since 2007. Data due on February 15 could give the Bank of Japan a green light to act.

Hideo Kumano, executive economist at Dai-Ichi Life Research Institute, said the main factor behind Japan's GDP decline was currency fluctuations. He said cheap money is shrinking the size of the Japanese economy.

In dollar terms, Japan’s economy will shrink from $6.3 trillion in 2012 to about $4.2 trillion in 2023, according to the International Monetary Fund. That’s largely due to the Japanese currency’s plunge from less than 80 yen to the dollar to about 141 yen last year. In nominal yen terms, the economy could have grown more than 12% over that period.

Meanwhile, the possibility of Germany's economy surpassing Japan's has attracted little attention, due to public discontent with economic policies amid persistent inflation, soaring energy prices and slowing growth.

Both economies share common problems of aging populations, scarce natural resources, dependence on exports and auto production.

While Germany is facing a shrinking labor supply, the trend is more pronounced in Japan, where the population has been falling steadily since around 2010. That has led to a chronic labor shortage that is expected to worsen as the birthrate remains low. Japan’s fourth-quarter 2023 GDP data is expected to show flat private consumption, increasing the economy’s reliance on external demand.

Meanwhile, the Indian economy is expected to surpass both of these economies in the next few years. According to IMF data, the Indian economy is expected to surpass Japan's by 2026 and Germany's by 2027.

India’s population surpassed China’s last year and the country is expected to maintain growth for decades to come. With more than two-thirds of its people of working age (15 to 64), India is expected to produce more goods and drive technological innovation, in contrast to many other Asian countries facing shrinking and aging populations.

India’s large population is clearly an advantage, but the challenge is to use the workforce efficiently with rising labor force participation rates, said Santanu Sengupta, India economist at Goldman Sachs Research. India could gain further advantage over China if it eases regulations and lowers tariffs to attract more investment as companies look to mitigate geopolitical risks associated with China.

Prime Minister Narendra Modi’s government is offering billions of dollars in financial incentives to boost domestic manufacturing and turn India into a global export hub. The $24 billion program is showing some success as companies like Apple and Samsung Electronics build more facilities in the country. The goal is to increase the sector’s contribution to GDP to 25% by 2025.

Japan is trying to tap into some of that growth potential, dedicating public funds to boosting production capacity and securing domestic semiconductor supplies as part of a long-term plan that aims to triple revenue from domestically produced chips to more than 15 trillion yen ($100 billion) by 2030.

Mr. Kumano said Japan needs to establish more technology-intensive industries domestically, such as building R&D centers.

One reason Japan is not too worried about losing its place in the global economic rankings is the stable standard of living of its people. The declining population has more or less helped maintain GDP per capita in local currency terms.

However, Japan will need more workers to produce goods and consume them. Attracting more foreign workers is a small step in that direction.

(according to VNA)

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