Germany will overtake Japan as the third-largest economy, thanks to a weak yen

(Bloomberg) — The German economy is projected to displace Japan as the world’s third-largest in 2023, helped by a decline in the value of the yen against the dollar and euro.

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The latest International Monetary Fund forecasts estimate Germany’s nominal gross domestic product this year at $4.43 trillion, compared with Japan’s $4.23 trillion.

The projections come as the yen approaches 160 against the euro and remains within striking distance of the 33-year low against the dollar that triggered a second round of currency interventions last October. The last time the euro reached 160 yen was in August 2008.

The yen’s weakness is largely due to fundamental differences in monetary policy. The Federal Reserve and European Central Bank raised interest rates from pandemic lows to tackle inflation, while the Bank of Japan remained in stimulus mode, looking to spur price increases after years of deflation.

While the Fed and ECB are expected to keep interest rates on hold at their upcoming meetings, expectations that borrowing costs will remain higher for longer are likely to keep pressure on the yen. The BOJ meets next week amid speculation about possible changes to its bond yield controls, but it is widely expected that an end to negative interest rates will not come until next year.

Still, the numbers also point to more stable long-term growth in Germany, which will worry policymakers in Japan as they consider the details of their latest economic package.

It’s true that Japan’s growth potential has declined and remains sluggish, Japan’s Economy Minister Yasutoshi Nishimura said on Tuesday when asked about the IMF’s forecasts. We would like to regain the ground lost over the last 20 or 30 years. We want to achieve this through activities like our upcoming package.

Prime Minister Fumio Kishida said Monday that the economic stimulus package includes an extension of energy subsidies to help cushion the cost of living collapse caused by Japan’s highest inflation in decades. He said steps would also be taken to ensure wage growth continues, along with some form of tax cut.

IMF data shows that Germans are probably also feeling much better off than the Japanese. Average gross domestic product per person in Germany is projected to be $52,824, compared with $33,950 in Japan.

–With help from Yumi Teso.

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