Germany Poised to Overtake Japan as World's Third-Largest Economy Amid Weakening Yen

By IndraStra Global News Team

Cover Image Attribute: Frankfurt skyline, Image by Leonhard Niederwimmer from Pixabay

According to the latest forecasts by the International Monetary Fund (IMF), Germany is expected to become the third-largest global economy in 2023, surpassing Japan. This change is mainly attributed to the devaluation of the Japanese yen compared to the US dollar and the euro.
The IMF's projections indicate that by 2023, Germany's nominal gross domestic product (GDP) is expected to reach an impressive US$4.43 trillion, outpacing Japan's GDP, estimated at US$4.23 trillion. This development is primarily linked to the yen depreciation, hovering near the 160 yen to the euro mark. Notably, it remains within striking distance of its 33-year low against the US dollar, prompting a second currency intervention round in October 2022. The last time the euro reached this level against the yen was in August 2008.
The yen's weakness can be attributed to fundamental disparities in monetary policy. While the Federal Reserve in the United States and the European Central Bank (ECB) have increased interest rates from their pandemic-induced lows in response to rising inflation, the Bank of Japan (BOJ) has maintained a stimulus-oriented approach. After years of deflation, the BOJ has been striving to stimulate price growth.
While the Federal Reserve and ECB are expected to maintain their current interest rates at upcoming meetings, the anticipation that borrowing costs will remain elevated for extended periods will likely exert further pressure on the yen. The BOJ is set to meet next week, with speculation regarding a potential adjustment to its control of bond yields. However, a complete reversal of its negative interest rate policy is not anticipated until 2024.
These economic projections reflect a trend of more sustained, long-term growth in Germany, raising concerns among policymakers in Japan. As Japan contemplates the details of its forthcoming economic stimulus package, Japanese Economy Minister Yasutoshi Nishimura acknowledged the IMF's projections, stating, "It's true that Japan's growth potential has fallen behind and remains sluggish. We'd like to regain the ground lost over the past 20 or 30 years. We want to achieve that through measures such as our upcoming package."
Prime Minister Fumio Kishida has emphasized that the economic stimulus package will encompass an extension of energy subsidies to mitigate the impact of Japan's soaring inflation, the highest in decades. Additionally, measures to ensure sustained wage growth and potential tax reductions will be included in the package.
The IMF's figures also highlight the discrepancy in living standards between the two nations. The average gross domestic product per person in Germany is projected to be US$52,824, in stark contrast to the figure for Japan, which is estimated at just US$33,950.
The IMF's October report also anticipates slightly higher growth in Japan, revising its 2023 forecast to 2%, driven by increased tourism and a rebound in auto exports, which had previously been affected by supply-chain disruptions. However, the report suggests that Japan's economic ranking might continue to decline, with projections indicating it could slip to the fifth-largest economy between 2026 and 2028.
Additionally, as per the same report, India's GDP is anticipated to overtake Japan in 2026, positioning India as the third-largest economy by 2027. Several analysts, including those from S&P and Morgan Stanley, predicted that India could surpass Japan and Germany to become the world's third-largest economy, following the United States and China, by 2030.
During its World Economic Outlook briefing, IMF Chief Economist Pierre-Olivier Gourinchas acknowledged India as "one of the growth engines in the world economy."
In the same report, the IMF downgraded its growth forecast for China from 5.2% to 5%, citing the need for increased consumption due to a real estate market downturn.
Although the IMF's projections did not factor in the Israel-Hamas conflict that began on October 7, officials noted that heightened geopolitical tensions, including the ongoing conflict in Ukraine, are expected to have ripple effects on the global economy.  

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