Japan, once the second-largest economy in the world, has been eclipsed by Germany as the world’s third-biggest economy, after the Asian giant unexpectedly slipped into recession in 2023. The latest data released by the Japanese government on Thursday, 15th February, showed that the country’s gross domestic product (GDP) contracted by 0.4% on an annualized basis in the fourth quarter of 2023, following a revised 3.3% decline in the previous quarter.
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This marked the second consecutive quarter of negative growth, which is the common definition of a recession. For the whole of 2023, Japan’s nominal GDP grew by 5.7% over 2023 to reach 591.48 trillion yen, or $4.2 trillion based on the average exchange rate in 2023. Germany, on the other hand, saw its nominal GDP grow by 6.3% to reach 4.12 trillion euros, or $4.46 trillion based on last year’s average exchange rate. Nominal GDP measures the value of output in current dollars, without adjusting for inflation.
The Rise and Decline of Japan’s Economy
Japan’s economic rise after World War II was remarkable and unprecedented. The country transformed itself from a war-torn nation into a global economic powerhouse, driven by its export-oriented industries, such as automobiles, electronics, and machinery.
Japan’s GDP grew at an average annual rate of 9.6% from 1955 to 1973 and reached its peak in 1995, when it accounted for 18% of the world’s GDP. Japan was the second-largest economy in the world, behind only the United States, and enjoyed a high standard of living, low unemployment, and low inequality.
However, Japan’s economic miracle came to an end in the early 1990s, when the country entered a prolonged period of stagnation, deflation, and debt, known as the “lost decades”. Japan’s economy was hit by the bursting of a massive asset bubble, which had inflated the prices of stocks and real estate to unsustainable levels.
The factors behind Japan’s decline
Japan’s economic decline can be attributed to a combination of structural, demographic, and external factors, which have eroded its competitiveness, productivity, and innovation.
Some of the main factors are:
- Aging and shrinking population: Japan has one of the oldest and fastest-aging populations in the world, with a median age of 48.4 years and a fertility rate of 1.36 children per woman in 2023.
- Low productivity and innovation: Japan’s productivity, measured by GDP per hour worked, has been lagging behind other advanced economies, such as the United States, Germany, and France, for decades.
- Strong yen and weak global demand: Japan’s economy has been adversely affected by the appreciation of the yen, which has made its exports more expensive and less competitive in the global market.
The Consequences for Japan and its People
Japan’s economic decline has had significant social, political, and environmental consequences for the country and its people.
Some of the main consequences are:
- Rising poverty and inequality: Japan’s poverty rate, measured by the percentage of people living below 50% of the median income, has increased from 12.2% in 2000 to 15.7% in 2023, the highest among the Organization for Economic Cooperation and Development (OECD) countries.
- Declining confidence: Japan’s economic decline has also eroded the confidence and happiness of its people, as they face uncertainty, insecurity, and stress. Japan’s consumer confidence index, which measures the degree of optimism or pessimism that consumers have about the economic situation, has fallen from 43.5 in 2000 to 35.1 in 2023, the lowest among the G7 countries.
- Happiness: Japan’s happiness level, measured by the World Happiness Report, which ranks countries by how happy their citizens perceive themselves to be, has also dropped from 41st in 2000 to 62nd in 2023, the lowest among the G7 countries.
- Increasing environmental challenges: Japan’s economic decline has also posed environmental challenges for the country, as it struggles to balance its energy needs, climate commitments, and nuclear safety. Japan’s energy mix has changed significantly since the 2011 Fukushima nuclear disaster, which led to the shutdown of all its nuclear reactors, which accounted for 30% of its electricity generation in 2010. Japan has increased its reliance on fossil fuels, especially liquefied natural gas (LNG) and coal, which accounted for 77% of its electricity generation in 2023, up from 62% in 2010.
The regional effect of Japan’s decline
Japan’s economic decline has also had implications for the regional and global order, as it affects its relations with its neighbors, allies, and rivals. Japan’s decline has weakened its influence and leadership in the Asia-Pacific region, where it faces various challenges, such as:
- China’s peaceful rise: China surpassed Japan as the world’s second-largest economy in 2010 and has become the dominant power in the region, with its growing economic, military, and diplomatic clout. China has also challenged Japan over the disputed Senkaku/Diaoyu islands in the East China Sea.
- North Korea’s nuclear and missile threats: North Korea has posed a serious and direct threat to Japan’s security, as it has developed and tested nuclear weapons and ballistic missiles that can reach Japan and beyond. North Korea has also conducted several provocative acts against Japan, such as launching missiles over Japanese territory, abducting Japanese citizens, and conducting cyberattacks on Japanese institutions
- South Korea’s strained relations: South Korea is an important neighbor and partner for Japan, as they share common values, interests, and challenges in the region. However, Japan-South Korea relations have been strained by historical and territorial disputes, which have undermined trust and cooperation between the two countries. The main sources of contention are the issues of wartime forced labor and comfort women, which have led to lawsuits, boycotts, and diplomatic spats, and the sovereignty over the Dokdo/Takeshima islands, which have sparked maritime tensions and protests.
Conclusion
Japan’s economic decline is a complex and multifaceted phenomenon, which has been caused by a combination of structural, demographic, and external factors, and which has had significant consequences for Japan and its people, as well as for the regional and global order.
Japan faces many challenges and uncertainties in its quest to revive its economy and restore its influence and leadership in the world. Japan will need to implement bold and comprehensive reforms to address its productivity and innovation gaps, its aging and shrinking population, and its fiscal and energy problems.
Japan will also need to enhance its cooperation and communication with its allies and partners, especially the United States, and manage its relations with its competitors and adversaries, especially China and North Korea. Japan’s economic decline is not inevitable or irreversible, but it will require vision, courage, and action from its leaders and people.
