Japan, once a top contender for the world’s leading economy, is now ranked fourth, trailing behind Germany. Japan struggles with recession and a series of economic challenges. This shift comes over a decade after Japan lost its second-place position to China.

In 2023, Japan’s economic growth was 1.9%, but its GDP stood at US$4.2tn in dollar terms, trailing behind Germany’s US$4.5tn. The weakening of the yen against the dollar over the past two years, with a nearly 20% drop in 2022 and 2023, is a significant factor in this change. A weaker yen negatively impacts export profits when earnings are repatriated, affecting Japan’s economic performance.

Germany, now the third largest economy, faces its own challenges. It includes an ageing population, dependence on exports, and a scarcity of resources. Russia’s war in Ukraine has led to rising energy prices, further impacting Germany’s economy, along with increasing interest rates in the eurozone and a chronic shortage of skilled labour.

While a weak yen benefited Japanese exporters, Germany’s more favourable labour situation allowed it to maintain its economic position. Japan, on the other hand, struggles with a severe labour shortage and a low birthrate. Despite efforts to boost the birthrate, chronic labour shortages are expected to worsen in the coming years.

To address these challenges, Japan is attracting a record number of foreign workers. Yoshitaka Shindo, the Economy Revitalisation Minister, emphasised the importance of structural reforms, including increasing women’s participation in full-time work and reducing barriers to foreign investment.

The Japanese government, led by Minister Shindo, is committed to implementing various policy measures to support wage increases, aiming to stimulate demand-driven growth. However, data released on Thursday indicates a contraction of 0.1% in real GDP in the last quarter of 2023 compared to the previous quarter, meeting the technical definition of a recession.

Weak spending by both households and businesses contributed to the contraction. Private consumption, constituting over half of Japan’s economic activity, declined by 0.2% due to household challenges, including the increasing cost of living and a decline in real wages.

The current economic downturn echoes Japan’s challenges in the early 1990s when the burst of its asset-inflated bubble economy led to a prolonged period of economic stagnation and deflation. Known as the lost decades, this era marked a significant turning point in Japan’s economic trajectory, challenging earlier predictions of surpassing the US to become the world’s largest economy.