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Japan slides into recession, loses third-largest economy status

In a surprising turn of events, Japan’s economy has slipped into recession for the second consecutive quarter, fuelled by sluggish domestic demand. This downturn has led to the re-evaluation of Japan’s global economic standing, causing it to lose its position as the world’s third-largest economy.

The shift in rankings dates back to 2010 when China’s economic growth propelled it ahead of Japan, which was then the second-largest economy behind the U.S. Initially predicted by the International Monetary Fund to fall to the fourth position, the recent economic challenges have expedited this decline.

Nominal GDP, measured in dollar terms, plays a crucial role in these global rankings. Japan’s nominal GDP for the previous year amounted to USD 4.2 trillion, a figure that now places it slightly below Germany. The latter’s nominal GDP, announced last month, ranged between USD 4.4 trillion to USD 4.5 trillion, depending on currency conversion.

The economic contraction is evident in the latest data for the October-December quarter, where Japan’s economy shrank at an annual rate of 0.4%, with a 0.1% contraction from the previous quarter. Despite a 1.9% year-on-year growth in real GDP, these recent numbers paint a concerning picture for Japan’s economic outlook.

Both Japan and Germany share a history of building their economies through robust small and medium-sized businesses, emphasising solid productivity. However, challenges such as a weak yen and global economic shifts have put Japan at a disadvantage.

The weakening economic conditions have led experts to anticipate a diminished global presence for Japan. Tetsuji Okazaki, a professor of economics at the University of Tokyo, notes that even sectors that once bolstered Japan’s strength, like the auto industry, are now facing challenges, especially with the rise of electric vehicles.

As the gap between developed and emerging nations narrows, Okazaki predicts that India is poised to overtake Japan in nominal GDP in the coming years. These developments underscore the dynamic changes in the global economic landscape and the need for strategic measures to address Japan’s economic challenges.

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