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Cheap Japan: Losing Its Rank as the World's Third-Largest Economy

The IMF says Japan's economy will be surpassed by Germany in 2023 and India in 2026. To reverse this trend, "cheap Japan" may need a major policy overhaul.



International Monetary Fund headquarters in Washington, DC on September 22. (©Kyodo)

Japan is at a critical juncture in 2023, as its nominal GDP in United States dollars is projected to decline. This means that Japan will lose its rank as the world's third-largest economy to Germany, a country with only two-thirds of its population. This change reveals the deep-rooted phenomenon of "cheap Japan," characterized by a weak yen, low prices, and low wages, reflecting the country's long-term economic stagnation.

According to the latest projections from the International Monetary Fund (IMF), Japan's nominal GDP in 2023 is expected to decrease by 0.2%, reaching $4.2308 trillion USD (approximately ¥640 trillion JPY). In contrast, Germany anticipates an 8.4% increase, reaching $4.4298 trillion USD. The US, holding the top position, is expected to have a GDP of $26.9496 trillion USD, with China following at $17.7009 trillion USD.

Cheap Yen and Inflation Rates

In 2003, Japan's nominal GDP stood at a larger $4.5195 trillion USD, making it the world's second-largest economy. This figure was 2.7 times greater than China's and 1.8 times that of Germany, showcasing Japan's economic strength. However, by 2010, China had risen to surpass Japan, and as of 2023, the gap has widened to 4.2 times.

Population size is a major factor in national power. Therefore, it is unsurprising that China with a population of 1.4 billion has overtaken Japan, which has 120 million people. But how did Japan fall behind Germany, which only has 80 million people?

The calculation of nominal GDP is based on actual transaction prices. It is affected by factors such as changes in exchange rates and price movements. Therefore, one contributing factor to Japan's economic decline is the depreciation of the yen and the disparity in inflation rates.

A monitor in Tokyo's Shimbashi district shows the yen is depreciating with the dollar in the low ¥151 JPY range on the Tokyo foreign exchange market, November 1. (©Sankei by Katsuyuki Seki)

Japan Lacking a Growth Strategy

However, Takeshi Minami, a Research Fellow at the Norinchukin Research Institute Co., Ltd. believes the more significant factor was "Japan's prolonged low growth." The yen's depreciation, resulting from the Bank of Japan's 2013 monetary easing measures, boosted the performance of export-oriented companies. However, the Japanese economy shrank when measured in dollars. Despite being in a low-interest-rate environment, Japan lacked a growth strategy. This hindered the activation of corporate investment and wage increases, ultimately reinforcing the image of a "cheap Japan."

In contrast, Germany experienced inflation at around 9% year-on-year at the beginning of 2023. By September, this gradually fell to the 4% range but remained generally higher than Japan's mostly 3% range. According to the Japan Productivity Center, labor productivity per person is 40% higher in Germany compared to Japan, allowing it to quickly catch up.


Future Challenges

Minami warns, "If Japan sticks with its conventional mindset, it will steadily fall behind other countries." According to IMF predictions, Japan will be surpassed by India in 2026, with the United Kingdom following quickly on the heels.

Amidst a continuous population decline, enhancing productivity is essential for Japan's economic growth. The government's economic measures include support for reskilling. However, as highlighted by Minami, some believe that "a fundamental policy overhaul is necessary for a significant boost in labor productivity."


(Read the article in Japanese.)

Author: Hiroyuki Manpuku

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