Japan’s Economy Shrinks to Fourth-Largest in World Amid Recession

The Japanese economy is now only the fourth-largest in the world, nearly a decade and a half after China overtook it as No. 2, according to preliminary economic data from the Japanese Cabinet.

The country’s GDP contracted for the second quarter in a row, which economists consider to be an early indicator of recession.

The downturn occurred on the back of a weak yen and continuing economic stagnation since the collapse of an asset price bubble in the early 1990s. Japan is also facing long-term economic headwinds such as a rapidly aging workforce and falling birth rate.

In the fourth quarter of 2023, Japan’s economy slipped by 0.4 percent year-on-year, adjusted for inflation, after a 2.9 percent tumble in Q3. Overall, it grew by 1.9 percent last year.

The nation’s nominal GDP, or GDP without adjustment for inflation, was $4.2 trillion. It is now in fourth place behind the U.S., China and Germany.

India is set to pass both Japan and Germany to become the third-largest economy by 2030, S&P Global Market Intelligence predicted in December.

Newsweek has reached out to Japanese Prime Minister Fumio Kishida’s office with a written request for comment.

The depreciation of the yen did not happen in a vacuum, Hideo Kumano, chief economist at the Dai-ichi Life Research Institute’s Economic Research Department wrote in an analysis published Thursday.

It was “driven by the BOJ’s [Bank of Japan] inability to raise interest rates,” he said.

Kumano pointed out that while other countries are aggressively tightening up their monetary policy to counteract inflation, “only Japan has implemented ultra-loose monetary policy under inflation.”

Tightening monetary policy is a tool used by central banks that involves hiking short-term interest rates, which raises the cost of—and therefore discourages—borrowing.

When prices rise and negative interest rates are maintained, the value of the currency inevitably falls.

Another pessimistic sign in Thursday’s report was private consumption, which comprises about 55 percent of Japan’s GDP in nominal terms. This was down 0.2 percent. Business investment ticked downward by 0.1 percentage points.

While China’s GDP now dwarfs that of its East Asian neighbor, economists have cast doubt both on its true size and growth figures.

Japanese reporter Hideo Tamura recently published a breakdown of his estimate that the second-largest economy actually shrank last year, instead of hitting the 5.2 percent growth touted by Beijing.

In terms of per-capita-GDP, China’s average $13,200 income per person is barely over a third of Japan’s $34,600 figure.