Japan’s economy has contracted for a second straight quarter documenting broad-based fall in domestic demand and public spending. The Japanese government reported that their economy shrank at an annual rate of 0.4 per cent in October to December quarter, according to Cabinet Office data on real GDP released recently, though it grew 1.9 per cent for all of 2023. It contracted 2.9 per cent during July-September.

Japan’s economy is now officially stepped into recession and it adds pressure on its central bank the Bank of Japan, to raise interest rates for the first time since 2007. The Bank of Japan kept overnight interest rates at minus 0.1 per cent at its most recent policy meeting in January 2024.

Japan was historically considered as an economic miracle as she raised from the ashes of World War II to become the second largest economy after the US. It kept that going through the 1970s and 1980s. In the last 30 years the economy has occasionally grown moderately, mainly remaining in the doldrums after the collapse of its financial bubble began in 1990.

Japan’s economy is powered by strong small and medium-size businesses with solid productivity and generation of employment with a greater multiplier effect. Japan’s economy was the second largest until 2010, when it was overtaken by China. Japan’s nominal GDP was $4.2 trillion last year, while Germany’s was $4.4 trillion. Japan became the world’s fourth-largest after it contracted in the last quarter of 2023 and fell behind Germany.

Similarly, Britain also contracted late last year. Britain reported recently that its economy entered a technical recession in October-December, shrinking 0.3 per cent from the previous quarter. The quarterly decline followed a 0.1 per cent fall in the previous three-month period.

India impact

IMF expects India’s economic output to surpass that of Japan and Germany by 2026 and 2027 respectively if the current trend continues.

Further, World Economic Situation and Prospect Report of 2024 states that India is expected to sustain its position as the faster growing large economy with a projected growth rate of 6.2 per cent in 2024.

India is currently the world’s fifth largest economy trailing behind the US, China, Germany and Japan. The GDP figures for 2023 stands for the US at $27.94 trillion and China at $17.5 trillion while India’s GDP is currently around $3.7 trillion and its growth rate remains robust.

Multinational companies now view India as an attractive destination for diversifying their supply chains.

The flipside

However, on the negative side Japan being a key trading partner and investor, a recession there could affect the Indian exports across sectors such as automobiles, electronics, and machinery.

Any fluctuations in the value of the yen against the Indian rupee could influence India’s import costs. Japan’s slowing down its R&D spending or innovation initiatives might indirectly hit India’s tech sector, disrupting collaborations, and technology transfers.

Owing to the interconnected nature of global financial markets volatility stemming from Japan’s economic challenges could have implications for investment flows too.

To conclude, with the gap between developed nations and emerging economies becoming narrow, India is in a pivotal position to capitalise the current opportunity to become a significantly player in the global economic ecosystem.

India is now in a unique position to contribute substantially to the growth of the global economy in the coming years.

Indian policymakers and businesses should closely monitor the current situation and skilfully leverage it to our benefit.

The writer is a professor of finance and accounting at IIM Tiruchirappalli