Japan’s Slips to Fourth-Largest Economy

Japan, once touted to lead the global economy, now faces the reality of slipping to the fourth-largest economy in the world. This development, set to be confirmed by the latest growth figures, underscores the challenges posed by its feeble currency and aging demographics, which have contributed to a decline in its relative economic standing.

Despite expectations of a return to growth in the fourth quarter after a period of contraction, Japan’s annual figures are likely to reveal a shortfall compared to Germany, reflecting a broader trend of economic repositioning. The emergence of India as a potential economic powerhouse, poised to overtake both Japan and Germany in the coming years, further highlights the shifting dynamics of the global economy.

The news of Japan’s descent down the economic rankings has prompted introspection among policymakers and the public, raising questions about the nation’s trajectory. While the rise of China in 2010 elicited significant concern, the current decline has been met with relative calm, attributed in part to the recognition of currency distortions and the uninspiring state of Germany’s economy.

Hideo Kumano, executive economist at Dai-Ichi Life Research Institute, identifies currency movements as a primary factor behind Japan’s GDP decline, noting that the nation’s weakening currency has contributed to its diminished economic stature. Despite nominal growth in yen terms, Japan’s economy has contracted in dollar valuation, further exacerbated by Germany’s economic challenges.

Japan’s demographic decline, characterised by an aging population and labor shortages, poses additional hurdles to economic growth. While Germany faces similar challenges, Japan’s population decline has been more pronounced, leading to chronic labor shortages and increased reliance on external demand. In contrast, India’s burgeoning population and favourable demographics position it as a key driver of future growth, offering opportunities for technological innovation and increased productivity.

India’s proactive measures to attract foreign investment and stimulate domestic manufacturing further underscore its economic potential, with initiatives aimed at increasing the sector’s contribution to GDP by 2025. Japan, meanwhile, seeks to bolster its technological capabilities, particularly in semiconductor production, as part of efforts to revitalise its industrial base.

Despite Japan’s stable living standards and per capita GDP, sustained economic growth will require addressing demographic challenges and fostering innovation. While efforts to attract foreign workers represent a step in the right direction, Japan must embrace broader reforms to tap into its full economic potential and adapt to a rapidly evolving global landscape.