For the first time in 55 years, Germany overtook Japan in gross domestic product (GDP) in 2023, thanks in part to the weak yen.

Japan is now the world’s fourth-largest economy.

The Cabinet Office announced on Feb. 15 that Japan’s nominal GDP, including the effects of commodity prices, increased 5.7 percent from the previous year to 591.4 trillion yen, but when converted to U.S. dollars, it decreased by 1.1 percent to $4.2 trillion.

This falls behind Germany, which has a nominal GDP of $4.4 trillion.

Japan’s nominal GDP reached a record high due to growth in consumption and exports following its recovery from the COVID-19 pandemic.

The real GDP, excluding the effects of commodity prices, also rose by 1.9 percent.

Both figures marked three consecutive years of positive growth.

Germany overtaking Japan in nominal GDP is largely attributed to the yen’s depreciation.

The average exchange rate in 2023 was 140.5 yen to the dollar, around 9 yen weaker than the previous year’s average.

Germany’s nominal GDP also expanded by 6.3 percent in 2023, driven by commodity prices that surged more rapidly than in Japan.

However, of more serious concern is the Japanese economy’s long-term stagnation.

Despite Germany having only two-thirds of Japan’s population, data from the International Monetary Fund (IMF) shows the real growth rate from 2000 to 2022 averaged 1.2 percent in Germany while it was only 0.7 percent in Japan.

“The difference in growth rates has accumulated over time, with the yen’s depreciation delivering the final blow,” said Shinichiro Kobayashi of Mitsubishi UFJ Research and Consulting Co.

Japan’s share of the world’s nominal GDP has declined from its peak of 17.8 percent in 1995 to 4.2 percent in 2022, according to the Cabinet Office.

LAGGING BEHIND IN TECH

Amid rapid economic growth, Japan became the world’s second-largest economy in 1968, overtaking West Germany’s gross national product (GNP).

In the 1980s, products “made in Japan” dominated the global market, with the country said to have been holding 30 to 40 percent of the TV market share.

But in 2010, Japan ceded its rank to China, putting it in third place.

In 2023, Germany took that third-place spot.

Now, home appliances are no longer a source of foreign currency earnings but are purchased from overseas.

The same can be said for smartphones, which have replaced TVs as the leading electronics product.

Japanese mobile phones--which had unique domestic services such as One-seg and i-mode--were once at the forefront of the global cellphone market.

However, the advent of smartphones quickly made them obsolete.

Major electronics companies such as Toshiba Corp. and NEC Corp. left the market one after another.

Now, the iPhone from the U.S. company Apple Inc. dominates half of Japan’s domestic market.

Japan remains highly competitive in manufacturing electronic components, however, such as sensors and cameras that are incorporated into smartphones.

While companies involved in the smartphone industry can continue to profit from sales, Japan’s ability to produce the final products and export them around the world has diminished.

Meanwhile, IT giants such as Apple and Google LLC have rapidly grown in the United States.

In Asia, companies such as Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co. (TSMC), which dominates the semiconductor industry, have emerged.

Japan has fallen behind the world in both innovation and manufacturing.

TAKING BUSINESS ELSEWHERE

Successive administrations have taken measures to pull the Japanese economy out of its prolonged slump.

But not enough has been achieved.

The “lost 10 years,” economic stagnation following the bursting of the asset-inflated bubble economy in the 1990s turned into 20 years and now 30 years.

Many experts say one of the major reasons is the failure to halt the falling birthrate.

In 1989, when the Japanese economy was at its peak, the Nikkei 225 hit a record high of 38,915 points at the Tokyo Stock Exchange’s final session of the year.

By then, however, there were already signs of a declining population: the total fertility rate, which indicates the number of children a woman is expected to have in her lifetime, had fallen to 1.57, the lowest postwar number.

Companies do not generally invest in a country that has effects of a bubble collapse still lingering alongside a declining population.

They instead seek opportunities in nations where growth is expected and the risk of any exchange rate fluctuations is minimal.

Even the “weak yen policy” under the second Shinzo Abe administration’s “Abenomics” did not change this trend.

Panasonic Corp., for example, ended domestic production of TVs in 2021, consolidating the production in Malaysia and other countries.

Fujitsu Ltd. sold off its previous core businesses such as mobile phones and computers.

Excluding competitive industries such as automobiles and materials, manufacturing continues to be hollowed out.

Neglecting domestic investment has led to delays in developing new fields, such as digital technologies, and has also failed to increase labor productivity.

Low productivity means low wages.

Japan’s nominal wages rose by an annual average of only 0.2 percent from 2000 to 2022, according to the Cabinet Office.

During that time, the nominal wages in the United States climbed 3.3 percent, in Britain 2.9 percent and in Germany 2.2 percent.

“The gap has widened as a result of an annual accumulation of these figures,” a senior Cabinet Office official said.

The IMF estimates that Japan’s nominal GDP per capita in 2023 is around $34,000, ranking 34th in the world.

It is the lowest among the Group of Seven nations and much lower than the average.

Among developed countries, Japan’s wage levels are low, and the weaker yen makes them even lower.

“Cheap Japan” may attract tourists, but it cannot draw top talent from around the globe.

(This article was compiled from reports by Yoichi Yonetani, Nanami Watanabe and Takeshi Narabe.)