This article is adapted from the business magazine Capital and is available here for ten days. Afterwards it will only be available to read at www.capital.de. Like stern, Capital belongs to RTL Deutschland.
At first glance, the news sounds like a success story: Germany is overtaking Japan as the third largest economy in the world. The change of location has already been predicted several times, but now it is official thanks to new economic data. With a gross domestic product (GDP) of $4.46 trillion, Germany generated around $250 billion more than Japan.
The problem is: There is no historical growth story behind this, because the majority of this development is based on currency developments. To compare GDP, it is converted into dollars. And since the Japanese yen has recently performed extremely weakly in contrast to the euro, Germany benefits when converting it into dollars. For example, if one were to use the average exchange rate of 2021, Japan would have generated around $5.74 trillion. Germany, on the other hand, only 4.88 trillion euros.
Nevertheless, there are also real economic developments that explain the exchange. According to government data on Thursday, Japan’s economy contracted an annualized 0.4 percent from October to December, the second quarter of negative GDP in a row. Experts polled by Reuters had actually expected an economic recovery and predicted an increase of 1.4 percent after economic output was revised downwards by 3.3 percent in the summer. In Germany, GDP fell by 0.3 percent over the same period, i.e. less sharply than in Japan. Next year, growth there is expected to be just 0.2 percent.
This is one of the reasons why there are similar debates in Japan as there are here. “The fact that Germany has overtaken Japan shows that we urgently need to press ahead with structural reforms and create a new phase of growth,” said Yoshitaka Shindo, Japan’s minister for economic revitalization.
The numbers are dramatic for Japan because the country basically has demographic advantages. The population is aging more rapidly, but with 126 million inhabitants, there are still around 43 million more people living in Japan than in Germany. So the problems are actually deeper and are not just due to the exchange rate.
A particular problem is the loss of purchasing power in the country. Inflation in Japan was 3.2 percent last year, but wage growth averaged only 2.5 percent. A call from the government to companies to increase wages obviously came to nothing.
The loss of real wages translates primarily into falling consumer spending, which was particularly felt by clothing stores and restaurants. Private consumption is actually the mainstay of the economy in the Far Eastern country, which is now cracking. Some experts expect a further decline in GDP in the current quarter as weak demand in China, weak consumption and production stops at Toyota are likely to slow the economy.
Investment spending also fell before the turn of the year – by 0.1 percent. The forecasts were based on an increase of 0.3 percent. Foreign demand contributed 0.2 percentage points to GDP as exports rose 2.6 percent from the previous quarter, according to the data. “Particularly noticeable is the lull in consumption and capital spending, which are key pillars of domestic demand,” said Yoshiki Shinke, senior economist at the eponymous life insurer’s Dai-ichi Life Research Institute in Tokyo.
The weak data could cast doubt on the Bank of Japan’s (BoJ) forecast that rising wages will boost domestic demand, justifying an end to loose monetary policy in the foreseeable future. There had recently been speculation on the markets that the central bank could end its negative interest rate policy in April in view of rising wages and price increases.
Inflation has been higher than the BoJ’s target of two percent for over a year. However, many monetary watchdogs have stressed that they want to see more evidence that price increases are being driven by domestic demand rather than external factors such as expensive oil. Several large companies have already announced their willingness to raise wages further. Central Bank Chairman Kazuo Ueda called this development “encouraging.”
