Japan Falls into Recession and Declines in Rank to 4th Largest Economy by GDP in 2023
Lead StoryBusiness
The shifting economic tectonic plates of 2023 eked out several unexpected and sizeable business shocks around the globe last year, but one which few some coming was Japan’s fall from its long-standing position as the third-biggest economy in the world – as well as one that just went into recession.
Data released by Japan’s government yesterday revealed that its real Gross Domestic Product declined by 0.1% in Q4 on a quarter-by-quarter basis. That compares to an originally projected 1% GDP growth the consensus of economists had forecast for the nation during that period.
On an annualized basis, Japan’s economy declined at a rate of 0.4% during the fourth quarter.
The same government agencies also revised economic figures for the July-September quarter downwards at the same time they announced the fourth quarter results. The latest figures show Japan’s GDP slid by 3.3% for the summer period, compared to previous projections announced in October which said it fell by only 2.9% for those three months.
The surprise poorly performing business results in Q4, coupled with the revised numbers for Q3, pushed net total growth performance for Japan GDP down to just 1.9% for the entire year. The current dollar GDP for the entire year for the country was just $4.2 trillion.
The successive two quarters of economic decline for Japan’s economy means the country is now officially in a recession.
The fall to just $4.2 trillion in GDP, although in theory that is “just a number”, is in many ways symbolically far worse than declaring Japan to be in a recession. That drop moved Japan for the first time in the 21st century from its long-standing position as the world’s third-largest economy to now the fourth-biggest one.
The number one economy in the world based on GDP for 2023 was the United States. Its economic performance in 2023 also surprised economists last quarter but in a positive way. It grew in the fourth quarter at a surprising 4.8% annualized rate, fueled by consumer and government spending, along with stronger-than-projected job growth, extremely low inflation, and consumer confidence levels which have not been seen for years. The total current-dollar GDP for the U.S., not adjusted for inflation, ended up rising by 6.3%, or $1.6 trillion, to a new high of $27.36 trillion.
The U.S. has held the number one spot in GDP since 1871.
Coming in as the number two global financial engine was the People’s Republic of China, although some place it in the number one spot. It also grew at a stronger-than-expected rate, at least based on the country’s own financial tallies via the National Bureau of Statistics, of 5.2% for the year. The nation closed its year with 126.06 trillion renminbi (RMB), which is equivalent to U.S. $17.52 trillion.
The strongest factors driving China’s growth was a 7.2% increase in retail sales, industrial production added value up 4.6%, and services up 5.8%. Factors which dragged its economy lower than it could have been were lagging fixed asset investments which ran at just 3.0% and a lackluster increase in foreign trade which went up by just 0.2%.
For 2024, economists believe China real estate development market, which is struggling as its once-biggest developer Evergrande is being forced to liquidate assets and Country Garden, an even bigger builder which has now defaulted multiple times on its loans, could pull its whole economy down far more rapidly going forward. China also saw its share of exports for its biggest customer, the United States, overtaken by Mexico in 2023 for the first time in decades. Although both of those issues, along with an unsustainable retail economic growth number from last year and sluggish foreign trade in general, are expected to put further pressure on China’s economy this year, its position as the second-largest economy in the world will remain solid.
If Japan had succeeded in achieving the projected 1% GDP growth for Q4, it would have retained its title as the globe’s third-largest economy. It had hung onto the number two position after the United States for decades but fell below that of China starting in 2010 and has not recovered the rank since that time. A major reason for that shift was China’s manufacturing economy, specifically in the high-tech segments, which rose as Japan’s fortunes as a major manufacturer for most global economic segments began to decline. Japan’s corporations contributed to this fall by shifting much of their own consumer electronics manufacturing, even in segments it once held the position of market leadership in such as consumer photography and high-end audio gear, away from their home country to China.
The one exception for Japan for years in this has been its automobile industry, which in the 80s and 90s, with Toyota at the helm, had dominated the lists of the highest sales volumes for this industry category. That has suffered particularly badly during the last five years, as world demand shifted away from gasoline-powered and hybrid vehicles to pure electric vehicles (EVs). Once again, much of the volume related to this part of Japan’s industry moved away, some to the United States thanks to Tesla’s market dominance and other domestic suppliers, and now recently to multiple Chinese suppliers.
That country’s BYD, the Chinese conglomerate whose initials stand for “Build Your Dreams”, became the largest EV manufacturer in the world several years ago, with total unit sales of 1.9 million in 2022. Parts of BYD and other companies in China also now dominate world sales for electric vehicle batteries, which are manufactured all over the world now, with major new factories now expanding at the fastest rate in Latin America.
Beyond its business focus issues, other concerns have also contributed to Japan’s long-term economic decline.
One is that, like China, it built its economy on a growing building boom and related corporate asset acquisition spree. The peak of that bubble hit in the 1990s. It artificially propped up GDP numbers for years, only to see demand for those assets drop as the current century began. The demand came down both because of the shifting of many business interests outside the country as noted earlier, because of an aging population with less interest in buying into a higher-risk economic area like this, and because other aspects of the economy were also moving into a far slower-growth period than the asset-grab peak period at the end of the 20th century.
This is all now exacerbated by a declining birthrate, among other things. There were just 6.995 births per one thousand people in Japan last year, a number only slightly more than half the 12.009 births per thousand in the United States. It has also been declining steadily this century, and at rates of over 1.3% per year for each of the previous four years. Such low numbers affect the economy over time by decreasing demand for everything from consumer goods to durable ones such as automobiles, appliances, and housing. The low birthrate also impacts the size of the national workforce. While Japan is doing what it can to stimulate buying within its population and encourage people to marry at higher rates earlier, plus to have children, it also has been forced to take steps to encourage more women to join the workforce, something its cultural norms have actively discouraged from the end of World War II all the way to present day.
With Japan’s economy down this last year, it provided Germany the opportunity to slide into the ranks of the world’s largest economies at number three.
Germany accomplished this not because it has a strong economy but mostly from past momentum. Unlike Japan, it closed the year with an actual net decline of 0.3% from 2022 to 2023. But that fall was still small enough to allow Germany to close its books with its GDP logging in at $4.46 trillion last year, compared to Japan’s $4.2 trillion.
The nearly stagnant growth for Germany is connected to multiple factors. High inflation rates connected to goods shortages because of NATO's war on Russia through Ukraine and record-breaking heat and drought which impacted the country’s agricultural business represented one of several major causes. Surging government expenditures as a percent of GDP for national defense and spending to support NATO and Ukraine were another. Energy prices in the country also remained high, as lower-cost natural gas supplies Germany used to rely on from Russia were replaced by LNG air-shipped from the United States at premium prices and other more expensive sources in the North Sea.
Germany’s domestic manufacturing economy also suffered from a lack of demand, perhaps related to the ongoing war in Ukraine added to other worries that Israel’s genocide of the Palestinian people could blow up into a major confrontation on multiple fronts in the Middle East.
Like Japan, Germany also has an aging population, so it too has a growing problem with the percentage of the workforce in the most active parts of the consumer economy falling rapidly over the last few years. That aging population is also creating another problem this European nation has in common with Japan, which is the availability of workers to support an economy it would like to grow. Importing workers has created its own problems.
What Germany does have that Japan does not is a strong well-established set of trading partners from within the European Union and the United Kingdom, as well as from the United States. So, while it may continue to have trouble growing like Japan does, it is far less likely than Japan to slow down even more in the near term.
In the end, this means Japan’s GDP will likely fall even further in 2024 while Germany’s remains roughly flat, leaving the economic rankings with Japan at fourth place likely unchanged when this year is complete.
Even as the news about Japan’s GDP fall from expectations in the fourth quarter was revealed, Yoshitaka Shindo, the country’s official economy revitalization minister said his country needed to take this proof of the “imperative” to institute new structural reforms. Among those, he said, would be to assist with a nationwide campaign to bring more women into the workforce and ease the current complex web of regulations throttling foreign investment in the country.
“We will [also] deploy all policy steps to support pay raises” everywhere feasible, he added, to encourage more consumer spending from within. But, higher wages means that more manufacturing will be shifted to lower cost nations.