TOKYO - Japan's economy is now the world's fourth largest after it contracted in the last quarter of 2023 and fell behind Germany.

 

Despite growing 1.9 percent, Japan's nominal 2023 GDP in dollar terms was $4.2 trillion, government data showed on Thursday, compared with $4.5 trillion for Germany, according to figures released last month.

 

The change in positions primarily reflects the sharp fall in the yen against the dollar, rather than the German economy - which contracted 0.3 percent last year- outperforming Japan, economists said.

 

The Japanese yen slumped by almost a fifth in 2022 and 2023 against the US dollar, including around 7 percent last year.

 

This was in part because the Bank of Japan has maintained negative interest rates in an effort to boost prices, unlike other major central banks that have raised borrowing costs to fight soaring inflation, media reported.

 

"The overtaking … in size in dollar terms owes a lot to the recent collapse in the yen. Japan's real GDP has actually outperformed Germany's since 2019, " Fitch Ratings economist Brian Coulton said.

 

Germany's heavily export-dependent manufacturers have been hit particularly hard by soaring energy prices in the wake of the Russia-Ukraine conflict.

 

Europe's biggest economy has also been hampered by the European Central Bank raising interest rates in the eurozone as well as uncertainty over its budget and chronic shortages of skilled labor.

 

Japan is heavily reliant on exports, in particular cars, although the weak yen - making exports cheaper -has helped big firms like Toyota offset weakness in key markets.

 

But it is suffering more than Germany in terms of worker shortages as its population falls and birthrates remain low, and economists expect the gap between the two economies to widen.

 

Thursday's data showed that Japan's economy shrank an adjusted 0.1 percent quarter-on-quarter in the last three months of last year, missing market expectations of 0.2 percent growth.

 

Growth for the third quarter was also revised downward to -0.8 percent, meaning that Japan was in technical recession in the second half of last year.

 

Japan "has not made progress in raising its own growth potential", the Japanese financial daily Nikkei said in a recent editorial. "This situation should be taken as a wake-up call to accelerate neglected economic reforms."

 

As Japan grapples with challenges, India is projected to overtake Japan in 2026 and Germany in 2027 in terms of output - although not in GDP per capita - according to the International Monetary Fund.

 

UK in recession

 

The news came on the same day as official data showed that Britain is in recession. The UK's GDP shrank 0.3 percent in the fourth quarter of 2023 after contracting 0.1 percent in the prior three months, the Office for National Statistics said in a statement on Thursday.

 

That places the economy in recession, which is defined as two quarters of falling GDP in a row.

 

While economists predicted that the recession could be short-lived, the data is a big setback for Prime Minister Rishi Sunak, who has placed economic growth as a priority.

 

In a broad-based decline, all main sectors shrank in the fourth quarter- with manufacturing and construction among the biggest drags.

 

The economy was broadly flat last year with 0.1 percent expansion, down from growth of 4.6 percent in 2022, the ONS said.

 

Finance minister Jeremy Hunt insisted the economy was on the mend, even if inflation stands at 4 percent, double the Bank of England's target rate.

 

"High inflation is the single biggest barrier to growth," he said after the release of GDP data. "Although times are still tough for many families, we must stick to the plan -cutting taxes on work and business to build a stronger economy."