Who will be the third largest economy in the world this year?
Recently, the International Monetary Fund (IMF) predicted in its latest World Economic Outlook that Japan's nominal gross domestic product (GDP) in US dollars will be surpassed by Germany in 2023, sliding from third to fourth place in the world.
Meanwhile, the IMF predicts that India will become the world's fourth largest economy by 2026, while Japan will decline to the fifth largest economy between 2026 and 2028.
Regarding this change, Japanese Minister of Economy and Industry Nishimura Yasumi responded on the 24th, "Japan's growth potential has indeed fallen behind and is still sluggish. Nishimura stated that in order to regain the economic status lost in the past 20 or 30 years, Japan hopes to achieve this goal through measures such as a package plan.
At the opening ceremony of the new parliament on the 23rd, Japanese Prime Minister Fumio Kishida stated in his policy speech that he has recognized the rapid rise in prices as a drag on consumption and investment, and will make stimulating economic growth the top priority for the next three years. He plans to finalize the latest economic measures at a cabinet meeting on November 2nd.
Why was Germany overtaken?
The IMF's specific forecast shows that Japan's nominal GDP in 2023 is approximately $4.23 trillion, a decrease of 0.2% compared to 2022. In 2023, Germany's nominal GDP will grow by 8.4%, approximately $4.43 trillion. Therefore, in terms of nominal GDP, Germany will rise to third place, while Japan will slide to fourth place.
Meanwhile, in terms of per capita GDP, the latest IMF estimate shows that Germany will also be higher than Japan. Among them, Germany's per capita GDP is expected to be 52800 US dollars, while Japan's per capita GDP is approximately 34000 US dollars.
In fact, this change has been reflected in the comparison of data in the first half of this year. Regardless of the first quarter data released by the Japanese and German governments or the overall performance in the first half of this year, Japan has been surpassed by Germany and lost its position as the world's third largest economy. Among them, based on the data released by the governments of both countries in the first half of the year, Japan's nominal GDP is equivalent to $2.13 trillion and Germany's is $2.18 trillion.
The recent volatility of the yen in the market is considered the most significant factor in this change. At the time of the release of the above forecast, the exchange rate of the Japanese yen against the US dollar was hovering around 150 levels, close to a 33 year low; The exchange rate of the Japanese yen hovering against the euro is close to 160, and the last time the euro hit this level against the Japanese yen was in August 2008.
At present, all parties are waiting to see when the Bank of Japan will intervene again. Last year, when the yen exchange rate fluctuated, the Bank of Japan had repeatedly intervened directly in the yen exchange rate, but the Japanese government has not intervened significantly in the exchange rate since the beginning of this year. Data shows that in September and October 2022, Japan used approximately 9 trillion yen (approximately $60 billion) in three separate interventions to support the yen, marking the first intervention by the Bank of Japan since 1998.
Chen Zilei, director of the Japan Economic Center at Shanghai University of International Business and Economics, explained to First Financial reporters that the main reason for the fluctuation of the yen is the difference in monetary policy between central banks: the Federal Reserve and the European Central Bank have chosen to respond to inflation by significantly raising interest rates, while the Bank of Japan has maintained a stimulus model, hoping to promote price growth after years of deflation, From the perspective of economic scale, if priced in US dollars, in fact, Japan's overall economy has been in a state of contraction since the first quarter of this year
Public data shows that in 2000, Japan's economy was approximately $4.97 trillion, ranking second in the world. At that time, the Japanese yen was around 105 against the US dollar. In 2010, China surpassed Japan to become the world's second largest economy, and for many years since then, Japan's economy has been ranked third in the world.
How does Japan catch up?
In addition to the recent weak performance of the Japanese yen in the exchange rate market, according to Chen Yan, Executive Director of the Japanese Enterprise (China) Research Institute, exchange rate fluctuations are only superficial and more of an economic stagnation problem that has plagued Japan for many years. In the 1980s and 1990s, Japan was the world's largest exporter of household appliances and a very important exporter of steel, automobiles, and chemical materials. In the semiconductor industry, Japan accounted for 60% to 70% of the world market share. However, currently, Japan's exports in these fields are significantly lower than before
Chen Yan believes that Japan has experienced over 40 years of economic growth since the 1960s, mainly driven by technological innovation. "The technological revolution and business revolution have stimulated the growth of the Japanese economy. However, today, the scale of Japan's technological revolution cannot be compared to more than 40 years ago
After being destined to "lose" its position as the world's third largest economy this year, the Japanese government hopes to catch up. Kishida has stated in his latest policy speech that the next three years or so will be positioned as a "period of change", aiming to concentrate efforts on achieving continuous salary increases and expanding equipment investment. At the same time, it is supplemented by tax preferential policies for specific industries to reduce the burden on the public and enterprises.
Chen Zilei believes that throughout the current Japanese society, as one of the three driving forces for economic development, personal consumption is weak, and whether it can overcome the difficulties depends on factors such as corporate salary increases and growth expectations.
In the labor negotiations this spring, the salary increase for Japanese companies this year was the highest in nearly 30 years since the start of statistics, with a median total of 3.8%. At present, the Japanese trade unions have announced the "basic concept" for next year's labor negotiations, requiring a total increase of more than 5% in basic wages and regular salary increases, setting a record high.
However, based on the current situation, how Japanese small and medium-sized enterprises, which account for about 70% of all employees, can raise wages in order to keep up with or even surpass the real wage increase that Kishida had previously advocated, is the key to achieving the goal. Mizuho Research and Technology believes: "Currently, Japan's wage increase is mainly a subsidy to the rise in import prices. However, in the future, as import prices decline, it is still worth watching whether the pace of wage increases next year will be as large
In addition, Chen Zilei also stated that the current equipment investment of Japanese companies is showing a growth trend, but whether it is sustainable remains to be seen, such as whether it can effectively connect with the development of emerging industries and innovative consumption patterns. He believes that the "light of hope" for future economic growth in Japan lies in leading investment, consumption, and exports with emerging industries, while also being vigilant against the decline in domestic demand in an aging and childless society.
In the latest World Economic Outlook, the IMF predicts that Japan's economy will grow by 2% this year, a 0.6 percentage point increase from July's estimate, thanks to the release of pent up consumption, a surge in inbound tourism, and a rebound in car exports. The IMF also predicts that Japan's Consumer Price Index (CPI) will rise by 3.2% and 2.9% in 2023 and 2024, respectively, with forecasts for both rising in April.