GENERICO.ruЭкономикаJapan slid into recession: no longer the third largest economy

Japan slid into recession: no longer the third largest economy

«People stop spending during natural disasters»

Japan slides into recession, allowing Germany to overtake itself as the world's third-largest economy.

Japan's economy contracted unexpectedly due to weak domestic consumption, pushing the country into recession and causing it to lose its position as the world's third-largest economy to Germany.

Gross domestic product contracted at an annual rate of 0.4% in the final three months of 2023, the Cabinet Office reported Thursday, following a contraction in the previous quarter, CNN reported. A recession is generally defined as two consecutive quarters of economic contraction.

Data confirms that Japan's economy was the world's fourth-largest in dollar terms last year after Germany.

Private consumption, which accounts for half the economy, fell 0.2% as Japanese consumers struggled with rising prices for food, fuel and other goods.

Japan imports 94% of its basic energy and 63% of food, so a weak yen significantly raises the cost of living, Neil Newman, Tokyo-based strategist at Japanmacro, told CNN.

“Private consumption was particularly weak and the market expected it to remain flat,” he said . “Unfortunately, the situation will worsen in January after the earthquake in the Sea of ​​Japan. People stop spending during natural disasters.”

Japan's economy, now the world's fourth largest, grew 1.9% in 2023 in nominal terms — meaning it is not adjusted for inflation — but in dollar terms its gross domestic product (GDP) amounted to 4.2 trillion dollars compared to 4.5 trillion dollars for Germany, notes The Guardian.

The shift, more than a decade after the country lost second place to China, is attributed to the sharp decline in the yen's value against the dollar over the past two years. A weaker yen eats into export gains as earnings are repatriated. The Japanese currency has fallen by nearly a fifth against the US dollar in 2022 and 2023, including a 7% fall last year.

Like Japan, Germany is resource poor, has an aging population and is heavily dependent on exports. Europe's largest economy has also been hit by rising energy prices caused by the conflict in Ukraine, rising interest rates in the eurozone and chronic shortages of skilled labor.

While Japanese automakers and other exporters benefited from a weak yen, which makes their goods cheaper on the international market, the country has a labor shortage worse than Germany, and it is struggling to cope with a low birth rate.

The failure of the Japanese government's attempts to boost the birth rate means chronic labor shortages are expected to worsen, even as the country welcomes record numbers of foreign workers.

Economic Revitalization Minister Yoshitaka Shindo told reporters that Germany, overtaking Japan, showed it was “critical” to advance structural reforms, including getting more women into full-time work and lowering barriers to foreign investment.

“We will take all policy steps to support wage increases” to stimulate demand-led growth, Shindo promises, Kyodo news agency reported.

Data released Thursday showed real GDP — total value of goods and services fell 0.1% in the final three months of 2023 from the previous quarter due to weak spending by households and businesses, according to Cabinet data.

Private consumption, which accounts for more than half of all economic activity in Japan, fell 0.2% as households struggled with rising living costs and falling real wages.

Growth for the previous quarter was also revised down to on the downside to -0.8%, meaning Japan is in a technical recession, usually defined as contraction for two consecutive quarters.

During the boom years of the 1970s and '80s, some predicted that thanks to cheap and high-quality exports of cars and consumer electronics, Japan will overtake the United States as the world's largest economy.

Instead, the bursting of Japan's asset-inflated bubble in the early 1990s ushered in several «lost decades» of economic stagnation and deflation.

The latest data reflects the reality of a weaker Japan that can expect to have a smaller presence in the world economics, said Tetsuji Okazaki, an economics professor at the University of Tokyo. “A few years ago, Japan, for example, boasted a strong automotive sector. But with the advent of electric vehicles, even this advantage has been eroded,” he said.

In 2010, China's newly acquired status as the world's second-largest economy prompted a bout of soul-searching in Japan about its ability to keep pace with emerging economies.

While Japan's recent fall to fourth place has been attributed to wild exchange rate fluctuations , losing third place to Germany's troubled economy would be a blow to its self-esteem and to already unpopular Prime Minister Fumio Kishida.

And the decline is unlikely to end there. The International Monetary Fund forecasts that India's economy, fueled by a large and growing young population, will overtake Japan in 2026 and Germany next year.

The Nikkei business newspaper said in a recent editorial that Japan has failed to boost its potential growth is a predicament that economists attribute to the demographic crisis.

“This situation should be seen as a wake-up call to accelerate neglected economic reforms,” the Nikkei report said.

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