Japan enters a recession due to an aging population and loses spot as the third-largest economy in the world.

Japan’s economy shrank in the final quarter of 2023, lagging behind Germany to become the fourth largest in the world.

According to Cabinet Office figures on real GDP issued on Thursday, the government indicated that the economy decreased at an annual pace of 0.4% from October to December of 2023, although growing by 1.9% overall. It shrank 2.9% from July to September. A contracting economy for two quarters in a row is regarded as a sign that the economy is technically in a recession.

Up until 2010, when China’s GDP overtook Japan’s, it was the second biggest. Germany’s nominal GDP last year was $4.4 trillion, or $4.5 trillion depending on the currency conversion, whereas Japan’s was $4.2 trillion.

Since nominal GDP comparisons are made in terms of dollars, the decline to the fourth position was primarily caused by a weaker Japanese yen. Economists assert that Japan’s relative weakness is partly a result of the country’s declining population as well as its trailing productivity and competitiveness.

A country’s real gross domestic product is a gauge of the worth of its goods and services. The annual rate calculates the outcome of applying the quarterly rate to one year.

Japan’s ascent from the ashes of World War II to become the second-largest economy after the United States has long been hailed as “an economic miracle.” That continued until the 1970s and 1980s. The economy has, however, mostly remained in a state of stagnation for the past 30 years from the start of the financial bubble collapse in 1990, growing only little at periods.

Solid productivity from small and medium-sized firms drives the economies of Germany and Japan.

Similar to Japan throughout the 1960s and 1980s, Germany dominated international markets for high-end goods like industrial machinery and luxury cars for the majority of this century. It sold so much to other countries that exports accounted for half of its GDP.

However, its economy, which was among the weakest in the world last year, shrank by 0.3% in the most recent quarter.

Similarly, Britain shrank towards the end of last year. The British economy shrank 0.3% from the previous quarter and went into a technical recession from October to December, according to data released on Thursday. The preceding three-month period had a 0.1% decline, which was followed by the quarterly decline.

Japan’s population has been declining and ageing for years as an island nation with few foreign residents, while Germany’s population has increased to around 85 million due to immigration helping to offset a low birth rate.

Tetsuji Okazaki, an economics professor at the University of Tokyo, stated that the most recent data illustrate the reality of Japan’s weakness and will probably lead to Japan having less influence globally.

Japan used to have a strong auto industry, for example, some years ago. But even that benefit is under threat from the introduction of electric cars, he claimed. “The outlook for Japan is dim when looking ahead to the next couple of decades,” although many circumstances have not yet come to pass.

With India expected to surpass Japan in nominal GDP in a few years, the gap between developed and emerging economies is closing.

With a GDP of $27.94 trillion in 2023 compared to China’s $17.5 trillion, the United States continues to have the greatest economy in the world. India’s GDP is currently estimated to be $3.7 trillion, and it is expanding at a heady 7% annually.

One way to address Japan’s labour deficit is through immigration, but the nation has not been very welcoming of foreign workers, except short-term visits, which has led to accusations of discrimination and a lack of variety.

Another option, robotics, is being used more and more, though not to the point where it can completely compensate for the labour shortage.

Japan’s slow growth is mostly due to stagnating salaries, which have made households hesitant to make purchases. Simultaneously, companies have made significant investments in economies with rapid growth abroad rather than in the ageing and contracting domestic market.

Last year, private consumption declined for three quarters in a row. According to Marcel Thieliant of Capital Economics, “growth is set to remain sluggish this year as the household savings rate has turned negative.” “Based on our forecast, GDP growth will decrease to approximately 0.5% this year from 1.9% in 2023.”