Kyodo News reported on Thursday that Japan risks losing its position as the world's third-largest economy to India in 2026, citing a weak yen, sluggish tourism recovery, and ongoing diplomatic tensions with the Chinese mainland. The warning follows Japan's economic contraction in the July–September 2025 quarter, which ended six consecutive quarters of growth amid declining exports and rising U.S. tariffs.
Analysts highlight that Prime Minister Sanae Takaichi's expansionary fiscal policies, aimed at stimulating domestic demand, have raised concerns about Japan's long-term fiscal health. These policies have exacerbated the yen's depreciation, which hit a 34-year low against the U.S. dollar in late 2025, further straining import-dependent industries.
Tourism, a key economic driver, remains below pre-pandemic levels due to slower-than-expected visa relaxations and reduced visitor numbers from the Chinese mainland. Cross-strait diplomatic strains have also impacted bilateral trade, with Japanese automakers reporting a 12% drop in mainland China sales this year.
Meanwhile, India's robust 7.8% GDP growth in 2025 positions it to overtake Japan, reflecting shifting economic momentum in Asia. Market watchers urge Tokyo to address structural challenges, including an aging population and energy dependency, to regain competitiveness.
