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Japan Enters Recession, Loses Spot as World’s 3rd Largest Economy
February 16, 2024
Japan’s economy is now the fourth-largest in the world after an unexpected economic contraction sent the nation into recession.
The Japanese economy shrank at a rate of 0.4% in the months between October and December, according to the nation’s official Cabinet Office. That follows a contraction of 2.9% in the months between July and September, meaning that GDP has contracted for two consecutive quarters, the commonplace definition of a recession.
Despite the weakness in the last two quarters of the year, total year GDP growth was still positive, amounting to 1.9% for the year. That was not enough to keep that nation’s status as the world’s third-largest economy.
Japan had been the second-largest economy in the world, behind the U.S., until 2010 when it was overtaken by China. Now, with a total nominal GDP of $4.2 trillion at the end of 2023, Japan has fallen behind Germany’s $4.4 trillion.
The weak yen is a key factor in the nation’s drop to fourth place, as comparisons of GDP are based on dollar terms, and the yen has seen a marked decline in value relative to the U.S. dollar. The exchange rate has fallen below 150 yen to 1 USD, a worrying sign that has prompted discussion among Japanese officials about potential measures to stabilize the current.
Part of the yen’s underperformance is stickier than expected inflation in the U.S., but Japan’s relative weakness is also a reflection of declining population, weakening productivity, and anemic private consumption.
Private consumption, which accounts for half of Japan’s GDP, fell for the third straight quarter, falling at a 0.9% annualized rate in the fourth. Capital expenditures also fell for a third consecutive quarter, down 0.3%, and investment in housing by the private sector plummeted 4%.
The recession is expected to moderate in the coming months, and Goldman Sachs is forecasting growth of 1% in the first quarter amid a strong labor market and improving business conditions.
