Germany to replace Japan as third-largest economy, due to weakening yen
City at Night
The International Monetary Fund's latest projections estimate Germany’s nominal gross domestic product at US$4.43 trillion (S$6.04 trillion) in 2023.

Germany’s economy is projected to dislodge Japan’s as the world’s third largest in 2023, helped by a slide in the yen against the dollar and the euro.

The International Monetary Fund’s (IMF) latest projections estimate Germany’s nominal gross domestic product at US$4.43 trillion (S$6.04 trillion) in 2023, compared with US$4.23 trillion for Japan. 

The projections come as the yen teeters close to the 160 mark against the euro and remains within striking distance of the 33-year low against the dollar that sparked a second round of currency intervention in October 2022.

The euro last reached 160 yen in August 2008.

The yen weakness has largely been caused by fundamental differences in monetary policy.

The Federal Reserve and the European Central Bank (ECB) have raised interest rates from pandemic lows to tackle inflation.

The Bank of Japan (BOJ) has meanwhile stayed in stimulus mode as it looks to nurture price growth after years of deflation.

While the Fed and ECB are expected to keep rates unchanged at their upcoming meetings, expectations that borrowing costs will stay higher for longer are likely to maintain pressure on the yen.

The BOJ meets next week amid speculation of a possible tweak to its control of bond yields, but the ending of its negative interest rate is not widely expected to come until 2024.

Still, the figures also point to steadier long-term growth in Germany that will concern policymakers in Japan as they mull over the details of their latest economic package.

“It’s true that Japan’s growth potential has fallen behind and remains sluggish,” Japanese Economy Minister Yasutoshi Nishimura said on Tuesday when asked about the IMF projections. “We’d like to regain the ground lost over the past 20 or 30 years. We want to achieve that through measures such as our upcoming package.” 

Prime Minister Fumio Kishida said on Monday the economic stimulus package includes an extension of energy subsidies, a measure aimed at helping ease the cost-of-living crunch caused by Japan’s strongest inflation in decades.

He added that there would also be steps to ensure upward momentum in wages stays in place, along with some form of tax reduction.

The IMF figures show that Germans are likely feeling a lot better off than Japanese, too. Average gross domestic product per person in Germany is projected at US$52,824 compared with US$33,950 in Japan. 

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