Photo/Illutration A port in Duisburg, a city in western Germany that serves as the country’s export hub (Kazuo Teranishi)

Germany almost certainly overtook Japan as boasting the world's third-largest economy in 2023, according to newly released German economic data. 

Japan’s gross domestic product, as measured by the U.S. dollar, was curtailed by the yen’s depreciation against the greenback, while the German GDP was boosted by inflation.

Germany announced on Jan. 15 that its nominal GDP for 2023 increased 6.3 percent from a year earlier to about 4.12 trillion euros.

The figure translates into about 4.5 trillion dollars based on the Bank of Japan’s average exchange rate for 2023.

Japan’s GDP statistics for the October-December period will be announced by the Cabinet Office in February.

But Mitsubishi UFJ Research and Consulting Co. estimates the country’s nominal GDP for 2023 at 591 trillion yen, or about 4.2 trillion dollars.

The figure represents a 5.7-percent year-on-year increase in yen terms but a 1.2-percent decrease in dollar terms due to the yen’s weakening.

Japan’s annual nominal GDP will match Germany’s if the figure for the final quarter of 2023 is about 190 trillion yen.

But it appears unlikely given that the figure for the October-December period of 2022 was about 147 trillion yen.

Nominal GDP is the total added value of goods and services produced by each country. It is a key indicator used to compare the size of a country’s economy.

The United States leads the world in nominal GDP, followed by China.

The switch in rankings between Japan and Germany in 2023 was forecast by the International Monetary Fund in October.

While the weak yen and German inflation contributed to the anticipated reversal, economists pointed to weaknesses in the Japanese economy.

Germany has outpaced Japan in economic growth rates over the long term, narrowing the gap in the size of the two countries’ economies. 

The German economy expanded 1.2 percent in real terms annually on average between 2000 and 2022, compared with Japan’s 0.7 percent, according to IMF data.

Shinichiro Kobayashi at Mitsubishi UFJ Research and Consulting said Japan’s exports and overall economic growth have stalled due in part to the risk-averse mindset ingrained in companies over the past three decades.

When the late 1980s asset-inflated economic bubble burst, companies downsized operations by slashing payrolls and selling off idle assets.

When the yen sharply strengthened following the collapse of U.S. investment bank Lehman Brothers in 2008, automakers and consumer electronics makers accelerated overseas production to shield themselves from exchange rate fluctuations.

Kobayashi said exporters have failed to cash in on the yen’s steep depreciation since 2022 because they chose not to invest in domestic production facilities.

“Exports would have grown even more in the past if the yen had weakened to 140 yen to the dollar,” he said. “Companies are now paying for the cost of having failed to invest at home.”

Chipmakers and other manufacturers announced plans to build factories in Japan in recent years.

However, Hideo Kumano at Dai-ichi Life Research Institute Inc. said both domestic and foreign companies will not choose Japan as a manufacturing base unless they receive subsidies.

Japan’s population is rapidly aging and shrinking.

“Companies will not invest in a country if domestic demand is weak,” Kumano said. “It will be impossible to stop Japanese companies from seeking growth opportunities overseas.”

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.

Although Japan’s population is less than a 10th of those of India and China, Japan’s nominal GDP per capita also dropped to 21st among OECD member countries in 2022, reflecting the decline in the country’s economic strength.

The yen’s depreciation also reflects Japan’s weak economic power, although it is attributed to multiple factors.

“The weak yen cannot be considered temporary considering Japan’s national strength,” Kumano said.

(This article was written by Kazuo Teranishi in Davos and Yoichi Yonetani.)

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