Germany to dethrone Japan as 3rd biggest economy

Germany is anticipated to surpass Japan as the world’s third-largest economy this year, owing to a decline in the value of the yen against the US dollar and the euro. According to the latest projections from the International Monetary Fund (IMF), Germany’s nominal GDP for this year is estimated to be $4.43 trillion, compared to Japan’s $4.23 trillion.

This shift is influenced by the yen’s weakening, with the exchange rate nearing ¥160 against the euro and remaining close to a 33-year low against the US dollar, prompting a second round of currency intervention in October of the previous year. The last time the euro reached ¥160 was in August 2008.

The yen’s decline is primarily attributed to differences in monetary policy. While the US Federal Reserve and the European Central Bank (ECB) have raised interest rates to combat inflation following pandemic lows caused by COVID-19, the Bank of Japan has maintained a stimulus approach as it seeks to stimulate price growth after a period of deflation.

It is expected that both the Fed and ECB will keep interest rates unchanged at their upcoming meetings, which is likely to sustain pressure on the yen, as borrowing costs are expected to remain elevated for an extended period.

The Bank of Japan is scheduled to meet soon, and there is speculation about potential adjustments to its control of bond yields, although the end of its negative interest rate policy is not widely anticipated until the following year.

These figures also point to more stable long-term growth in Germany, which could be a cause for concern for policymakers in Japan as they consider the specifics of their latest economic package. Japanese officials are aware that Japan’s growth potential has lagged and remains sluggish. They are striving to regain lost ground over the past few decades through measures such as upcoming economic stimulus packages.

Japanese Prime Minister Fumio Kishida has indicated that the economic stimulus package will include an extension of energy subsidies to alleviate the impact of Japan’s high inflation, along with efforts to maintain upward momentum in wages and potentially some form of tax reduction.

The IMF’s data also reveals a significant disparity in average GDP per person between Germany and Japan, with Germany’s projected average at $52,824, in contrast to Japan’s $33,950.