The U.S. state of California has endured its fair share of criticism over the years, from its growing homelessness crisis to the ever rising cost of living for everyday residents. However, last month the Golden State achieved a significant milestone: it surpassed Japan to become the world’s fourth largest economy, with the California economy now at $4.1 trillion compared to the Japanese economy at $4.02 trillion. While some might attribute this shift to currency fluctuations or temporary market dynamics, the symbolic weight of this development cannot be ignored. California, just one U.S. state, now outranks Japan, once the paragon of post-war economic resurgence. This reversal in economic influence speaks less to California’s rapid ascent and more to the persistent stagnation of Japan’s economy, demographics, and broader societal structures.
Japan’s decline in global economic rankings is, in part, a technical consequence of the yen’s dramatic depreciation against the U.S. dollar in recent years. Because global GDP comparisons are often expressed in nominal USD terms, even stable output can appear to shrink if a country’s currency weakens significantly. But to view Japan’s slippage solely through an exchange-rate lens would be to miss the broader picture. For over three decades, Japan’s economy has struggled with low growth, deflationary pressures, and demographic decline, with the population dropping to 120.3 million people in 2024, decreasing by nearly 900,000 from the previous year. Meanwhile, California’s tech-driven economy, bolstered by robust immigration and innovation ecosystems, has continued to grow in both output and global influence. In this context, the GDP shift is not just a financial technicality, it’s a reflection of diverging long-term trajectories.
Japan’s current challenges stand in stark contrast to its remarkable post-war economic ascent. From the 1950s through the 1980s, Japan achieved one of the fastest and most sustained periods of growth in modern history, growing on average 4.1 percent annually from 1980 to 1988. Through a combination of industrial policy, export-led manufacturing, and a disciplined workforce, the country transformed from a war-torn nation into the world’s second-largest economy by the 1990s. Japanese automobiles, electronics, and precision manufacturing became synonymous with global quality and efficiency, with Toyota ranked as the second most valuable car company in the world as of March 2025 and the world’s top-selling automaker in 2024. But this era of prosperity also sowed the seeds of future problems. The asset price bubble of the late 1980s, and the prolonged stagnation that followed its burst in the 1990s, marked the beginning of what would become known as Japan’s “Lost Decades.” While the global economy evolved rapidly, Japan struggled to adapt.
In the decades since the bubble burst, each Japanese administration has tried, often unsuccessfully, to reignite growth. Massive public infrastructure spending, near-zero and even negative interest rates, and repeated rounds of quantitative easing have become the hallmarks of Japan’s monetary and fiscal policy. However, spending alone has not induced long-term growth and aging infrastructure still remains a challenge, with 60 percent of road bridges and 40 percent of tunnels set to be at least 50 years old by 2033.
The most ambitious policy efforts came under Prime Minister Abe Shinzo (in office from September 2012 to September 2020), whose “Abenomics” strategy launched in 2012 promised a three-pronged approach: aggressive monetary easing, flexible fiscal stimulus, and structural reforms. While the first two arrows were deployed at scale, the third, arguably the most critical, remained largely blunt. Deep-rooted structural issues such as rigid labor markets, an aging population, and a resistance to immigration were never meaningfully addressed, with Japan’s working-age population set to drop to 55 million by 2050. As a result, the Japanese economy has remained stuck in a low-growth equilibrium, unable to recapture the dynamism that once defined its post-war miracle.
Among the most pressing (and least reversible) challenges facing Japan is its demographic collapse. The country now has one of the oldest populations in the world, with nearly 30 percent of citizens over the age of 65. At the same time, the birth rate has fallen well below replacement levels to 1.3, with children only making up 11.1 percent of the Japanese population compared to 21.7 percent in the United States. At the same time, marriages rose slightly to 10,000 in 2024, with fewer people opting to marry due to the burden of the country’s work culture. This demographic shift has led to a shrinking labor force, rising dependency ratios, and a healthcare system under immense strain, with healthcare costs increasing from 5.7 percent to 8.24 percent of GDP from 2000 to 2022. Efforts to boost the birth rate through subsidies, parental leave policies, and workplace reforms have had limited success. Without a significant change in immigration policy or a radical rethinking of how labor is structured, Japan’s economic engine will continue to slow – not because of a lack of talent or innovation, but because there are simply fewer people to sustain it.
California, by contrast, has benefited from a far more dynamic demographic profile. Its population is younger, more diverse, and continually replenished through both domestic and international migration, with 40 percent of the population now identifying as Latino. While the state faces its own challenges – including rising housing costs, income inequality, and infrastructure strain – it continues to attract talent from across the globe. Immigrants make up more than a quarter of California’s population and play a critical role in powering its economy, from agriculture and construction to Silicon Valley startups, with nearly two-thirds of tech workers coming from abroad. Moreover, California’s embrace of inclusive policies, world-class universities, and a strong innovation ecosystem has helped it remain competitive in a rapidly evolving global economy. In this regard, the state’s demographic and social openness stands in stark contrast to Japan’s demographic contraction and cultural reluctance to integrate foreign labor.
Another difference lies in the culture of innovation and corporate dynamism. California thrives on a high-risk, high-reward ethos, where failure is often seen as a stepping stone to success. Venture capital flows freely, startups are constantly emerging, and even large firms aggressively reinvent themselves to stay competitive. The University of California, Berkeley, considered the highest ranked public university in the world, was also listed as the top ranked institution for generating startup founders, companies, and female entrepreneurs in 2024.
In contrast, Japan’s corporate sector remains highly hierarchical and risk-averse. Many firms prioritize stability and seniority over agility and innovation, with lifetime employment still the norm in large enterprises, even though some major companies, such as Honda, have implemented plans to end this seniority system. While Japan continues to excel in advanced manufacturing and precision engineering, it has lagged behind in the digital economy, platform technologies, and entrepreneurial activity. A global survey published this year showed that consumer confidence in digital platforms in Japan was only 2.6 out of 10, compared to 8.6 out of 10 in China. This cultural conservatism, compounded by underrepresentation of women in leadership and limited external hiring, has hindered Japan’s ability to adapt to fast-changing global business landscapes.
Japan’s economic story is far from over, but it stands at a critical crossroads. The symbolic moment of California surpassing Japan should not be dismissed as a product of currency shifts or temporary market trends, because it is a reflection of deeper structural stagnation. To restore long-term vitality, Japan must go beyond legacy strengths and confront its demographic decline, embrace immigration and inclusion as strategic imperatives, and reimagine a corporate culture that rewards adaptability and innovation. Incremental reform is no longer sufficient. What is needed now is bold, forward-looking leadership capable of positioning Japan to thrive in a global economy defined by speed, diversity, and disruption.