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Japan’s nominal gross domestic product (GDP) has fallen to fourth place in the world. This is due to the recent depreciation of the yen and a history of deflation. Japan needs to completely break out of deflation and get its economy back on a growth track as soon as possible.
According to preliminary GDP figures released by the Cabinet Office, Japan’s nominal GDP in 2023 was ¥591.482 trillion ($4.2106 trillion), up 5.7% from the previous year.
Germany’s nominal GDP in 2023 has been announced at $4.4561 trillion. Falling below this figure, Japan is now fourth place behind the United States, China and Germany.
Nominal GDP is boosted by rising prices and is also influenced by exchange rates when comparing countries. Japan’s drop to fourth place is largely due to the decline in the figure in dollar terms as a result of the weaker yen as well as to large price increases in Germany. There may be no need to be overly pessimistic.
Nevertheless, it is also true that this reflects the long-term stagnation of the Japanese economy.
Japan surpassed the former West Germany in 1968 to become the second-largest economy in the world. After that, due to the prolonged recession following the bursting of the bubble economy, Japan was overtaken by China in 2010, falling to third place.
Amid prolonged deflation, companies gave top priority to cost cutting and neglected to raise wages and make investments. This led to a vicious cycle that pushed prices down further, and Japan’s nominal GDP did not grow.
The Japanese economy is now at a turning point to see if it can break the vicious cycle and instead achieve a virtuous economic cycle.
Corporate earnings are strong, and net profits of major listed companies for the fiscal year ending in March 2024 are expected to be the highest ever. In the stock market, the Nikkei Stock Average is approaching its bubble-era high. Consumption by foreign visitors to Japan is also recovering rapidly.
In order to use these positive factors to bring an end to deflation, it is essential for corporations to raise wages more than the rise in prices during this year’s shunto spring wage negotiations. If the wage increases stimulate consumption, creating a virtuous cycle, it will be possible for Japan to reverse the decline in its GDP rankings.
There are currently some signs of standstill in economic recovery. The preliminary real GDP for the October-December 2023 period, released at the same time, declined by an annualized 0.4% from the previous quarter, contracting for the second consecutive quarter.
Private consumption was sluggish, down 0.2% from the previous quarter. Corporate capital investment was also down 0.1%. Capital investment plans are said to have been stalled possibly by labor shortages in the construction industry.
Overcoming labor shortages will also be key to stable growth in the future. It is hoped that companies will make every possible effort, such as improving productivity by investing in labor-saving measures and improving work styles and working conditions.
The fall of Japan’s GDP to fourth place in the world should be used as an opportunity for the country as a whole to change its mindset in the face of deflation.
