Germany overtook Japan as the world's third-biggest economy, official data showed on Thursday, as fresh figures from Tokyo showed Japan's economy slipping into a recession.

Japan's nominal gross domestic product (GDP) for 2023 stood at $4.2 trillion in dollar terms, government data showed, compared to Germany's $4.5 trillion, according to the latest figures.

The yen slumped more than 18% against the dollar in 2022 and 2023. This includes a 7% depreciation last year, partly because the Bank of Japan (BOJ) has maintained negative interest rates.

Meanwhile, the euro used in Germany has been more or less stable against the dollar overall in the same period. 

India set to surpass both countries sooner than later

Both German and Japanese economies are facing comparable major issues of labor shortage, falling birthrates and aging populations, but Japan is the more acute case of the two.  

While the economy grew 1.9% overall, last year, it contracted for the last two consecutive quarters, data showed.

Two consecutive quarters of contraction is typically considered as the definition of a technical recession.

Both Japan, with a population of roughly 125 million people, and the considerably smaller Germany with roughly 83 million people, are known worldwide as exporters of high-end manufactured goods, with the most obvious shared example being the automotive sector.

For years, Japan was the world's second largest economy behind the US, until it was overtaken by China in 2010. 

Developing giant India, with a majority of its 1.4 billion population under the age of 35, and higher growth rates, is projected to leapfrog both economies to become the third largest in the world behind the United States and China, probably quite soon. 

Open questions for Bank of Japan on monetary policy

The weak data coming out of Japan is likely to cast a doubt on the BOJ's forecast that rising wages will push consumption and allow the central bank to phase out the stimulus.

"There's a risk the economy could shrink yet again in the January-March quarter due to slowing global growth, weak domestic demand and the impact of the New Year quake in western Japan," Takuji Aida, chief economist at Credit Agricole, told the Reuters news agency.

"The BOJ could be forced to sharply downgrade its rosy GDP forecasts" for 2023 and 2024, he said.

However, some analysts said that Japan's tight labor market and robust corporate spending plans had kept alive the BOJ's plans to exit the ultra-loose monetary policy.

"While the second consecutive contraction in GDP in Q4 would suggest that Japan's economy is now in recession, business surveys and the labor market tell a different story," Marcel Thieliant, head of Asia-Pacific at Capital Economics, told Reuters.

"Either way, growth is set to remain sluggish this year as the household savings rate has turned negative," he said. 

mk/msh (AFP, Reuters)