Japan’s recession costs it the title of world’s third-largest economy

Japan’s economy

Japan’s economy shrank for the third consecutive quarter in the last three months of 2023, entering a technical recession and losing its spot as the world’s third-largest economy to Germany. The decline was mainly due to weak domestic consumption, which was hit by higher prices and lower incomes.


People walking past a busy crossing in Tokyo, Japan on November 15, 2023. Zhang


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According to official data released on Thursday, Japan’s gross domestic product (GDP) contracted by 0.4% year-on-year in the fourth quarter of 2023, after a 2.9% drop in the previous quarter. This was worse than the median forecast of a 1.4% growth by economists polled by Reuters. The GDP deflator, a gauge of inflation, soared 3.8% on an annualized basis.

In dollar terms, Japan’s GDP amounted to $4.2 trillion in 2023, compared with $4.5 trillion for Germany, which grew by 2.1% last year. This marked the first time since 2010 that Japan fell behind Germany in nominal GDP rankings. Japan was also overtaken by China as the world’s second-largest economy in 2010.


The main reason for Japan’s economic slump was the sluggish private consumption, which makes up more than half of the country’s GDP. Consumer spending fell 0.2% quarter-on-quarter, as households faced higher costs for food, fuel and other goods. Japan imports most of its energy and food needs, so the weak yen, which depreciated by about 20% against the dollar in 2022 and 2023, pushed up import prices.


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Business investment

Business investment also decreased 0.3%, reflecting uncertainty over the global economic outlook and the impact of the coronavirus pandemic. Japan’s exports, however, rose 2.6% quarter-on-quarter, as the country benefited from a recovery in global trade and a weaker yen. Imports also increased 1.9%, resulting in a positive contribution of net exports to GDP.

The disappointing GDP figures cast doubt on the Bank of Japan’s (BOJ) plan to exit its ultra-easy monetary policy later this year. The BOJ has signaled that it will consider tapering its massive stimulus program, which has kept interest rates at or below zero and flooded the financial system with cash. The BOJ expects inflation to gradually pick up and the economy to return to its pre-pandemic level by 2024.

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However, some analysts argue that the BOJ may have to delay or revise its exit strategy, given the persistent weakness in domestic demand and the risk of further coronavirus outbreaks. They also point out that Japan’s inflation remains far below the BOJ’s 2% target, despite the surge in the GDP deflator, which mainly reflects higher import prices.


Japan’s economy, which was the world’s third-largest for most of the past three decades, is expected to grow modestly in 2024, as the government plans to implement a large-scale fiscal stimulus package and the vaccination program progresses. However, the recovery may be uneven and fragile, depending on the pace of the pandemic and the global economic situation.


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