Japan is no longer the world’s third-largest economy as it slips into recession

Germany has surpassed Japan to become the world’s third-largest economy, marking a significant shift as Japan unexpectedly enters a recession. Formerly the second-largest global economy, Japan reported two consecutive quarters of contraction, with a 0.4% annualized decline in the fourth quarter, following a revised 3.3% contraction in the third quarter. The fourth-quarter GDP fell well short of the 1.4% growth forecasted in a Reuters poll of economists.

A recession is commonly defined as experiencing two consecutive quarters of economic contraction. On a quarter-on-quarter basis, Japan’s GDP slipped by 0.1%, contrary to the 0.3% rise anticipated in the Reuters poll.

For the entire year of 2023, Japan’s nominal GDP increased by 5.7% to 591.48 trillion yen or $4.2 trillion based on the average exchange rate in 2023. In contrast, Germany witnessed a 6.3% growth in nominal GDP, reaching 4.12 trillion euros or $4.46 trillion based on the previous year’s average exchange rate.

Nominal GDP measures the value of output in current dollars without adjusting for inflation. Following the GDP release, the benchmark Nikkei 225 saw a 0.65% increase, briefly surpassing the 38,000 mark in the morning session. Investors interpreted the weak economic data as a potential signal that the Bank of Japan might delay its exit from the country’s long-standing negative interest rate policy.

The yen maintained its position around the 150 mark against the dollar, trading at 150.2 as of 1:55 p.m. Tokyo time (11:55 p.m. Wednesday ET). Charu Chanana, Head of FX Strategy at Saxo Markets, noted that the bleak growth outlook complicates the Bank of Japan’s ability to tighten policy, emphasizing the challenges posed by the economic situation.

In an earlier note, Chanana expressed concerns about the GDP contraction in the third quarter, questioning the sustainability of inflation driven by a virtuous cycle of increased real income and spending.