Japan slips down global economic ladder, loses third place to Germany

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SEOUL, South Korea — The long-held domestic fear of “Japan passing,” or long-term national decline, returned Thursday after Germany was officially confirmed as the world’s third-largest economy.

Government data showed that Europe’s leading economy outpaced Japan last year. Japan’s gross domestic product was $4.21 trillion, behind Germany’s $4.46 trillion. Only the U.S. and Chinese economies are larger.

Some analyses say two straight quarters of economic contractions have plunged Japan into a technical recession. Others say Japan’s problems run deeper than the ups and downs of short-term economic cycles.

“While the weak yen and German inflation contributed to the anticipated reversal, economists pointed to weaknesses in the Japanese economy,” Japan’s popular Asahi Shimbun daily reported. “Germany has outpaced Japan in economic growth rates over the long term, narrowing the gap in the size of the two countries’ economies.”

The news this week was no surprise. Reading the tea leaves in various economic reports and trends, the Asahi article ran on Jan. 16. International Monetary Fund data predicted the rankings change in October.

Angst about Germany’s eclipse of Japan is nothing new. The term “Japan passing” was coined in the late 1990s to reflect the country’s apparent fall from its peak. After sizzling postwar growth, Japan was seen in the 1980s as an economic powerhouse that might dethrone the U.S. as the world’s No. 1 economy. Those hopes were shredded in the early 1990s when asset bubbles burst, growth slowed and deflation began.

China’s replacement of Japan as the world’s second-largest economy in 2010, after 40 years, caused national introspection. Multiple administrations have been unable to force economic change through corporate reform or modernization of the notoriously low-tech federal bureaucracy.

“Germany overtaking Japan shows it is imperative for us to promote structural reforms and create a new stage for growth,” Yoshitaka Shindo, the minister in charge of Japan’s economic revitalization, told a press conference after the news broke.

The downshift in economic positioning reflects a weakening Japan that will likely result in a diminished global presence, Tetsuji Okazaki, a professor of economics at the University of Tokyo, told The Associated Press.

“When looking ahead to the next couple of decades, the outlook for Japan is dim,” he said.

Big weaknesses, surprise strengths

Japan’s economic malaise is real, but some surprise successes accompany the chronic problems.

Japan is the world’s oldest society, with a plunging birthrate that government policies have been unable to reverse. The homogeneous nation’s resistance to mass immigration is strong.

Tokyo has long favored a weak-yen policy, a critical factor in declining national prosperity.

Analysts say Japan Inc. is trapped in a Catch-22 situation. The weak yen was designed to promote exports, but the economy must rely heavily on exports because of the long-term weakness in consumer demand, a trend driven by long-term wage stagnation.

Japan’s top corporate players, such as former world leaders Sony and Canon, are now considered too conservative and slow to adjust to the modern international economy. Only one Japanese corporation made Interbrand’s list of the world’s top brands last year. Toyota was in sixth place.

At the other end of the economy, Japan’s weak inability to incubate “unicorns” — unlisted startups with values of $1 billion or more — is glaring. Japan is ranked 18th in domestic unicorns, far behind smaller economies such as Australia, Israel and South Korea.

Not all is dire.

Japanese manufacturers still have a global reputation for quality. Honda, Mitsubishi and Toyota made Yahoo Finance’s 2022 list of the top 20 manufacturing companies by revenue. Japanese companies are world leaders in car and motorcycle manufacturing, but Germany’s Volkswagen knocked Toyota off the No. 1 spot in revenue in 2022.

Japanese manufacturers are central to the downstream chip sector because of excellence in machinery and chemicals, but they have lost to South Korean and Taiwanese rivals in chipmaking development.

The nation is rich in world-class, design-centric small businesses in interior design, fashion and cuisine. Traditional Japanese cultural products such as judo and sushi are globally popular.

Japan’s popular culture is also an economic powerhouse. A study by U.S. financial firm TitleMax, “The Top 25 Media Franchises of All Time,” found that Japan is far more prosperous than Hollywood.

The two most profitable franchises were Pokemon and Hello Kitty, outpacing Winnie the Pooh, Mickey Mouse and Star Wars. Down the list, Japanese media brands such as the manga character Anpanman, the Mario video game and Jump Comics outpaced Harry Potter, the Marvel Cinematic Universe and the James Bond franchise.

Despite the successes, Japan may soon take another step down the economic ladder.

“The IMF expects India, which overtook China as the world’s most populous country in 2023, to surpass Japan in nominal GDP in 2026, sending Japan to fifth in the global rankings,” the Asahi report said.