Since the bursting of the bubble economy Japan has failed to invest in growth, and now the country's nominal GDP has been overtaken by Germany and fallen to fourth place globally.

If Japan hopes to keep up, it will have to break out of its long deflationary period and work to boost production efficiency.

Impact of weak yen

Chief Cabinet Secretary Yoshimasa Hayashi offered his explanation for why Japan's nominal GDP fell to fourth place at a press conference on Thursday.

"Companies suppressed wages and investment, which is the source of growth, so they could protect current profits. As a result, consumption stagnated. Prices were low and there was not much growth," he said.

Japan surpassed West Germany in gross national product and became the second largest economy after the United States in 1968 during a period of prosperity and rapid economic development.

However, in 2010 Japan was overtaken by China, whose economy had swollen in size as the "world's factory," and by 2023 Japan was down to fourth place globally.

The drop in world ranking comes on the back of some special circumstances.

Nominal GDP is compared in dollars, which means Japan's rank has been directly affected by the rapid depreciation of the yen since 2023.

The exchange rate used by the Cabinet Office to estimate GDP has depreciated by 30 yen, from about 110 yen to the dollar in 2021 to about 140 yen to the dollar in 2023.

Nominal GDP is also based on the amount of money actually exchanged, so it reflects increases in prices. Russia's aggression in Ukraine caused energy costs in Germany to skyrocket and inflation. Prices in Germany rose by 5.9 percent in 2023, much higher than the 3.1 percent rise in Japan.

A long time coming

The International Monetary Fund predicts that Japan will also be overtaken by India by 2026.

Though it is a simplistic comparison, Japan went from having the highest nominal GDP per capita among the Group of Seven industrialized countries in 2000 to being at the bottom of the list in 2022. In 2022 Japan also ranked 21st among the 38 member countries of the Organization for Economic Cooperation and Development, closely followed by South Korea in 22nd place.

"The past year was only the decisive blow. This is the result of 20 years of [neglected investment]," said Shinichiro Kobayashi, an economist at Mitsubishi UFJ Research and Consulting Co.

After the bursting of the bubble economy in the 1990s and the financial crisis triggered by the collapse of Lehman Brothers, Japan experienced deflation, and companies were unable to raise wages or boost domestic investment.

The yen's appreciation also contributed to the hollowing out of domestic industry, as manufacturers moved their production bases overseas in search of cheap labor.

"Japan has also been slow to respond to the declining birthrate, aging population and labor shortages that we knew were coming," Kobayashi said.

Low labor productivity and a delayed incorporation of women into the workforce have further hindered growth.

German reforms

Germany was once called the "sick man of Europe" due to growing unemployment after the unification of East and West Germany in 1990.

Germany, however, took advantage of European Union integration to lower corporate taxes so it could attract factories to the country. It also implemented bold labor market reforms in the 2000s, and using cheap natural gas from Russia, managed to boost exports of automobiles to China.

However, German's economy is by no means robust at present.

The European Commission, the executive arm of the European Union, released its Winter Economic Forecast on Thursday, predicting that real GDP in the eurozone will grow by 0.8 percent year on year in 2024. That's a downward revision from the previous forecast made in November last year.

This year's forecast noted that inflation in the eurozone is moderating, but consumer spending is sluggish and low growth is expected to continue due to slow growth in Germany, the largest economy in the eurozone.

Germany's nominal GDP grew 6.3 percent in 2023 but fell 0.3 percent in real terms, shrinking for the first time in three years.

Copyright: Asia News Network/The Japan Times