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For the first time in history, Germany has become the third largest economy, Japan's GDP has fallen to the fourth in the world, and the exchange rate is an important factor in the change of rankings

For the first time in history, Germany has become the third largest economy, Japan's GDP has fallen to the fourth in the world, and the exchange rate is an important factor in the change of rankings

For the first time in history, Germany has become the third largest economy, Japan's GDP has fallen to the fourth in the world, and the exchange rate is an important factor in the change of rankings

Japan's decline from the world's second-largest economy to the world's fourth-largest economy not only highlights the pressure on Japan's economic growth, but also stems from the deep aging of the population structure and Japan's conservative acceptance of immigration, which together create the dilemma of Japan's economic growth. According to the preliminary statistics released by the Cabinet Office on the 15th local time, Japan's real GDP will increase by 1.9% year-on-year in 2023, and the nominal GDP growth rate reflecting rising prices will be 5.7%. In October 2023, the International Monetary Fund predicted that Japan's nominal GDP would be overtaken by Germany in 2023 and fall to the fourth place in the world.

Japan overtook what was then West Germany in 1968 to become the world's second-largest economy. In 2010, Japan was overtaken by China, falling from second to third in the world. According to the International Monetary Fund, Japan's economy will be overtaken by India by 2026. According to the forecast of Goldman Sachs in the United States, by 2075, Japan's economy will fall to the 12th place in the world, behind countries such as Indonesia, Brazil and Nigeria.

For the first time in history, Germany has become the third largest economy, Japan's GDP has fallen to the fourth in the world, and the exchange rate is an important factor in the change of rankings

Image source: Sina Weibo

Exchange rates are an important factor in the change of rankings

Objectively speaking, the exchange rate is a very important factor in the decline of the Japanese economy. In 2023, Japan's annual economic growth rate of 1.9% is already a high figure for Japan, which is mired in stagnant economic growth, but even so, Japan's nominal GDP is still lower than Germany's, thus ceding the position of the world's third-largest economy. Germany's economy was sluggish last year, with GDP growth falling by 0.3%. The external factor that led to all these changes was actually the change in the exchange rate. Before 2010, Japan was the world's second-largest economy even for a long time since the bursting of Japan's real estate bubble in the 90s, overtaken by the mainland in 2010 and Germany last year. Japan's nominal GDP last year was $4.2 trillion and Germany's was $4.4 trillion or $4.5 trillion, depending on changes in the exchange rate.

Although the exchange rate is an important factor in the change in the rankings, Japan has been focusing on cutting costs for many years and has not adopted a proactive management approach such as expanding investment. In fact, this has brought a bizarre picture of joy and sorrow to the Japanese economy. Large corporations that have already completed their globalization and achieved overseas real estate sales have made a lot of money, doubling their operating profits and achieving record annual settlements, while most of Japan's small and medium-sized enterprises are struggling to survive by the weak yen that eats up most of their profits even if they have profits.

For the first time in history, Germany has become the third largest economy, Japan's GDP has fallen to the fourth in the world, and the exchange rate is an important factor in the change of rankings

Image source: NetEase News

In 2023, China's auto exports surpassed Japan's for the first time, ranking first in the world. Japan has also lagged behind in the field of technological innovation and emerging technologies. Another problem with the Japanese economy in 2023 is that some companies have made huge profits, and the government has also collected a large amount of corporate taxes, but these revenues have not flowed into the hands of the people, and consumption remains silent and sluggish. The companies themselves feel that the economy is "booming", while the people believe that the "hard days" are not yet to come. Therefore, how to convert corporate profits into national consumption is the key to the real "recovery" of the Japanese economy.   

The long-term lack of stable growth momentum of the Japanese economy is the deep reason why Japan's nominal GDP will be surpassed by Germany in 2023.  While the size of the economy has not changed much in the two or three decades since the bursting of the bubble, Germany has expanded significantly and has now surpassed Japan. After the bubble burst, Japan has not been able to find a long-term stable momentum for economic growth. Looking at the past two or three decades, it is not difficult to find that Japan's situation of importing a large amount of energy and resources from overseas has not improved, and the increase in the price of resources has led to an increase in the value of imports; the competitiveness of Japan's electronics industry has weakened, and the profitability of commodity exports has declined; and Japan's declining birthrate and aging population have intensified, and while Japan's domestic consumption has been compressed, the potential for economic growth has also been suppressed.

Germany and Japan have created "economic miracles" in history

When it comes to economic strength, Japan's heritage should not be underestimated. Japan has experienced an "economic miracle" in history, from the ruins of World War II to the second largest economy after the United States, in the 70s and even 80s, it was a miracle of the Japanese economy, but since the bursting of the financial bubble in the 90s, in the past 30 years, the Japanese economy has only grown slightly, although the overall life of the Japanese has not changed much, but stagnant growth itself means a recession. The Japanese economy is supported by the solid productivity of small and medium-sized enterprises (SMEs), which are strong behind it.

Similar to Japan in the 60s and 80s, Germany's economic performance since the end of World War II has also been very strong, dominating the global market with high-end products such as luxury cars and industrial machinery, and exports also account for half of the German economy. Throughout the 50s of the 20th century, the GDP of the Federal Republic of Germany grew by an average of 7.5% per year, surpassing that of other European and American countries at that time. The GDP of the Federal Republic of Germany grew from DM 79 billion in 1949 to DM 300 billion in 1960. In 1960, the Federal Republic of Germany became the world's third-largest economy after the United States and the Soviet Union. The Beetle, which is sought after by European and American hipsters, has become an important symbol of the economic miracle. In 1955, the millionth Beetle rolled off the assembly line at Volkswagen's Wolfsburg plant. Refrigerators, televisions, washing machines and radios "Made in West Germany" began to sell worldwide.

For the first time in history, Germany has become the third largest economy, Japan's GDP has fallen to the fourth in the world, and the exchange rate is an important factor in the change of rankings

Image source: Sina Weibo

After World War II, Germany has created a series of economic miracles, but last year, although Germany became the world's third largest economy, the German economy grew sluggishly last year, with a year-on-year decline of 0.2% and a month-on-month decline of 0.3% in the last quarter, due to the decline in investment in construction and machinery and equipment, as well as weak foreign trade demand. If the decline continues in the first quarter of this year, then Germany will also enter a so-called "technical recession". German Economy Minister Habeck recently said that Germany's economic growth this year is only 0.2%.

In particular, Japan's presence and influence in the field of automobile manufacturing, which has long occupied a dominant position in the past, is also declining significantly, not only has it been frequently exposed to car company fraud scandals and its competitive advantage has declined, but also failed to grasp the great changes in the global automotive industry in a timely manner, resulting in Japan losing its position as the world's largest automobile exporter in 2023. In response to this lack of momentum to drive long-term economic growth and stability, Daisuke Karamaka, chief market economist at Mizuho Bank of Japan, keenly pointed out that "it is a 'matter of time' for Japan to be overtaken by China, but it is not inevitable that Japan will be overtaken by Germany." The problem is not Germany's economic development, but Japan's economic growth and declining capacity for product development, which has been stagnant and not growing since the 90s of the last century." For a long time after the war in 1945, Japan's presence and influence in the international community mainly stemmed from its status as a world economic power, but now with Japan being overtaken by Germany, it has fallen to the fourth place in the world, and it is not even ruled out that it may fall to the fifth or sixth place in the world in the future, which will greatly reduce Japan's voice and appeal in the international community in the future.

Therefore, how to find the long-term stable momentum for economic development and pull the Japanese economy out of the long-term development quagmire may have become a top priority for the Japanese government. The Japanese government may be able to attribute all of this to the sharp depreciation of the yen, but if the economy remains sluggish for the next three to five years, it will become a real problem for Japanese society.

The rankings have risen, but the German economy still needs to move steadily

Germany has become the third largest economy, but the dominance of the industrial superpower is threatened, and the German economy needs to move forward steadily. Miele, a maker of household appliances, plans to lay off 2,000 jobs in Germany and relocate 700 jobs to its plant in Poland. Heating manufacturer Viessmann has transferred 3,000 jobs to Poland. Volkswagen said last year that it would build a new battery plant in the United States, and BASF announced plans to invest 10 billion euros in building a petrochemical plant in China at the time of layoffs at its headquarters in Germany. French steel tube maker Vallourec shut down production in Germany last September, while tire maker Michelin and its American rival Goodyear said they would also close their German plant by the end of 2025. Germany's industrial output has been declining since 2017, accelerating since 2022, when Russian gas imports were cut off to punish the conflict in Ukraine. Many century-old factories are closing, and other companies are moving production lines to lower-cost countries. In 2022, Germany cut off gas supplies to Russia and ramped up arms deliveries to Ukraine in support of NATO's proxy war against Russia. Two years on, alarming predictions about a major economic crisis and the massive deindustrialization of Europe's largest industrial economy are about to become a reality. With Berlin cutting off cheap and reliable gas supplies from Russia in 2022, German companies now have to pay one of the highest energy bills in the EU.

For the first time in history, Germany has become the third largest economy, Japan's GDP has fallen to the fourth in the world, and the exchange rate is an important factor in the change of rankings

Chart: Comparison of GDP trends between Japan and Germany from 1980 to 2023 Source: International Monetary Fund (IMF)

Although Germany's GDP surpasses Japan's, the two countries actually share the same disease. The International Monetary Fund compares what Japan and Germany have in common in many areas, especially in terms of the challenges they face: First, an aging population. Both Japan and Germany have aging populations, but this is more serious in Japan, which has been declining since 2010, with an aging population leading to a reduction in labor supply and sluggish growth in private consumption. Second, natural resources are scarce. Both Japan and Germany face the scarcity of natural resources, which forces them to rely on imports to meet their energy and raw material needs. The third is to rely on exports and the automobile industry. Both countries' economies are largely dependent on exports, which makes them very sensitive to fluctuations in global markets and changes in international trade policies.

Germany's GDP surpasses Japan's, reflecting the global economic situation, which seems to have contributed to Japan's global influence further decline. For Japan, the only way to achieve a "reversal" is to continuously improve production efficiency. For Germany, an increase in the ranking does not mean that the German economy is improving, and in order to restore its growth potential, it is urgent to introduce a long-term growth strategy, re-examine the industrial structure, and improve productivity. Senior economist Keiji Kanda pointed out that a society that improves redistribution policies, curbs the gap between the rich and the poor, and maintains a stable life is more conducive to everyone giving full play to their abilities.

Source: Beijing News Review, Interface News, Zhihu

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