By Nityant Sethi, September 1st 2024
Japan, formerly a global economic giant, has recently suffered massive blowback by entering into a recession and dropping to fourth place in the list of the world’s top economies (in terms of GDP) being overtaken by Germany. This raises questions about Japan’s future trajectory and standing in terms of a working population, technological innovation, and trade.
Japan’s economy declined at 0.4% in the fourth quarter of 2023, following an even steeper decline at 3.3% in the third quarter (Strait Times, 2024). This meant Japan had entered a recession, having two consecutive quarters of negative growth. The unexpected drop was likely due to weak internal demand for consumer products and services within the country, as the economy faced increased production costs, such as higher wages and raw material prices. These issues were made worse by a declining population, which lowered total demand and economic activity.
According to the latest CNN GDP figures, Japan has been replaced by Germany as the third largest economy globally, making it now the fourth-largest economy in the world. In fact its GDP rose by 1.9 percent in 2023, but when stated in US dollars it was $4.2 trillion compared to Germany’s $4.5 trillion (The Guardian, 2024). This highlights Japan’s growing concern over its declining domestic markets for its automobile and electronics industry and the persistent weakening of its national currency, the yen.
A pedestrian walks past an electronic board showing the closing numbers of the Tokyo Stock Exchange. Germany has overtaken Japan as the world’s third biggest economy. Photograph: AFP/Getty Images
The Yen’s Persistent Weakness
Economic struggles in Japan are a cause of constant depreciation of the yen. Since 2023, the yen has lost 6.6% of its value against the USD making it one of the worst performing currencies among other industrialized nations (BBC, 2024). This decline has led to higher import costs mainly for energy and food as Japan largely depends on these imports to meet its basic requirements. Japan’s imports reached a record high in 2022, as the yen inflated the already high food and energy costs. Chemicals made up 20% of total imports, followed by food (19%), mineral fuels (16%), machinery and electrical machinery (22%) as well as raw materials (8%) (Trading Economics). Japan’s primary food imports come from countries such as the US, China, and Brazil, which provide for agricultural products such as rice, meat, and seafood. Depreciation of the currency has decreased living standards, minimizing household budgets, leading to a substantial drop in private spending. In the fourth quarter of 2023, private consumption decreased by 0.9%. This was the third consecutive fall lasting three quarters (BBC, 2024).
A plummeted yen typically heightens exports by reducing the cost of Japanese goods to customers in other countries, but not so in this scenario. The traditional advantages of a weaker yen have been undermined by the rising production costs as well as the increased global competition. Reduced local demand and rising prices have not only eliminated the potential benefit of exports, but have also raised production costs, making Japanese goods less competitive even with a favorable exchange rate. Moreover the domestic market has been affected negatively by an aging population, shrinking its workforce and making it more difficult for the country to sustain economic growth. Japan faces challenges in maintaining productivity and guaranteeing long-term economic stability as the country’s working population declines and the number of retirees increase.
Demographic Challenges and Economic Stagnation
Japan’s financial challenges stem from a population crisis, characterized by one of the world’s most elderly populations that have caused a shrinking labor force and increasing dependency ratio thus placing great pressure on the economy. As of now, Japan’s median age is around 48 years where birth rates have been decreasing for decades, being 45 in 2010 and a predicted 53 in 2050, resulting in a decline of their young and working population (Pewresearch, 2014). This change in demographics has led to reduced economic production and slower growth as there are fewer workers available to enhance productivity and innovation. Additionally, Japan’s aged population has increased demand for social services such as healthcare and pensions thereby putting more stress on public resources within the country. Addressing these long term problems will require comprehensive approaches but slow progress may expose Japan to further economic stagnation (The Guardian, 2024).
Graph showing Japan’s declining population from 1950 to 2015. Japan has been following a similar decline in population ever since.
Works Cited
Author, No, and No Author. “Chapter 2. Aging in the U.S. and Other Countries, 2010 to 2050.” Pew Research Center, 14 Apr. 2024, www.pewresearch.org/global/2014/01/30/chapter-2-aging-in-the-u-s-and-other-countries-2010-to-2050/#:~:text=Japan%20currently%20has%20the%20oldest,2010%20to%2053%20in%202050.
He, Laura, and Montgomery. “Japan Just Lost its Crown as the World’s Third-Largest Economy.” Edition CNN.com, 15 Feb. 24AD, edition.cnn.com/2024/02/14/economy/japan-economy-recession-hnk-intl/index.html. Accessed 24 Aug. 2024.
“Japan Slips Into Recession, Loses Spot as World’s Third-largest Economy.” The Straits Times, 15 Feb. 2024, www.straitstimes.com/business/japan-slips-into-recession-loses-spot-as-world-s-3rd-largest-economy.
McCurry, Justin. “Japan Loses Crown as World’s Third-largest Economy After It Slips Into Recession.” The Guardian, 15 Feb. 2024, www.theguardian.com/world/2024/feb/15/japan-recession-economy-falls-behind-germany-worlds-largest.
Taylor, Adam. “It’s official: Japan’s population is dramatically shrinking.” Washington Post, 26 Feb. 24AD, www.washingtonpost.com/news/worldviews/wp/2016/02/26/its-official-japans-population-is-drastically-shrinking. Accessed 27 Aug. 2024.
TRADING ECONOMICS. “Japan Imports.” TRADING ECONOMICS, tradingeconomics.com/japan/imports#:~:text=Japan’s%20imports%20hit%20a%20record,raw%20materials%20(8%20percent).