California's Economy Surpasses Japan's to Become World's Fourth Largest Economy

California's economy has officially surpassed Japan's, making the Golden State the fourth largest economy in the world, according to recent data from the International Monetary Fund and the US Bureau of Economic Analysis.

The state's nominal GDP reached $4.1 trillion in 2024, edging out Japan's $4.02 trillion. This historic milestone positions California behind only the United States ($29.18T), China ($18.74T), and Germany ($4.65T) in global economic rankings.

"California isn't just keeping pace with the world – we're setting the pace. Our economy is thriving because we invest in people, prioritize sustainability, and believe in the power of innovation," Governor Gavin Newsom said in a statement announcing the achievement.

Remarkable Growth Rate

California's economy isn't just large, it's also growing faster than other major economies. The state posted a remarkable 6% growth rate in 2024, outpacing the United States (5.3%), China (2.6%), and Germany (2.9%). Meanwhile, Japan's economic output remained essentially flat, with its GDP in dollar terms declining as the yen weakened and its population decreased.

Key Drivers of California's Economic Success

California's economic expansion has been broad-based across multiple sectors:

Technology and Innovation

Silicon Valley and the San Francisco Bay Area remain global hubs for technological innovation. In 2024, Bay Area startups attracted $90 billion in venture funding, representing 57% of all US venture capital investment. California startups raised nearly 49% of all US VC funding in 2024, fueling innovation in software, biotechnology, artificial intelligence, and cloud computing.

Diverse Economic Base

While technology is a major driver, California's economy is powered by multiple sectors:

• Tech industry: Home to giants like Apple, Google, Meta, and Nvidia

• Entertainment: Hollywood remains a global cultural export powerhouse

• Agriculture: California is the nation's largest agricultural producer

• Clean energy: The state employs approximately 545,000 workers in clean-energy and clean-vehicle industries

• Tourism: Travel spending hit $150.4 billion in 2023, a record above pre-pandemic levels

Trade Performance

California engaged in $675 billion in two-way trade last year. In 2024, the state's goods exports totaled approximately $183.3 billion, with computer and electronic products ($47.9B) being the largest category. Key export markets included Mexico ($33.5B), Canada ($18.4B), and various Asian countries (nearly $71.9B total).

Population and Workforce Dynamics

California's population, which rebounded by approximately 250,000 people in 2024 to nearly 40 million, has played a crucial role in its economic growth. The state's labor market grew by roughly 30% or 4.2 million jobs, between 1998 and the second quarter of 2024. Meanwhile, Japan's workforce has been shrinking due to demographic challenges, contributing to its economic stagnation.

The Role of Monetary Factors

Several monetary factors have also influenced California's rise in the rankings:

• Exchange rates: The yen's weakness against the dollar has reduced the U.S. dollar value of Japan's output

• Interest rates: The U.S. Federal Reserve's higher interest rates (around 5.25-5.50%) have strengthened the dollar, while the Bank of Japan only recently ended negative rates

• Inflation: U.S. inflation has moderated to about 2.4% in early 2025, while Japan's has exceeded 3% for most of 2024-25

Challenges and Threats

Despite this milestone, California's economic position faces several challenges:

Tariff Tensions

President Trump's tariff policies could significantly impact California's trade relationships. Last week, Governor Newsom announced a lawsuit challenging Trump's executive authority to enact international tariffs without congressional support, calling the president's economic policies a "wrecking ball" to America's global reputation.

Regional Inequality

California is grappling with deep financial inequalities between its regions. In 2023, the Bay Area's per capita income was $131,000, more than double that of the Inland Empire and Central Valley.

Housing and Infrastructure

The chronic problems of housing unaffordability, homelessness, and delayed infrastructure improvements remain significant barriers to further growth.

Competition from India

India's economy, currently at $3.90 trillion, is predicted to overtake California's by 2026, according to current data trends.

Looking Forward

California's rise to become the world's fourth-largest economy represents a significant achievement, reflecting the state's diverse economic strengths and innovative capacity. However, maintaining this position will require addressing internal challenges while navigating an increasingly complex global trade environment.

The milestone comes six years after California surpassed the United Kingdom to become the world's fifth largest economy in 2018, demonstrating the state's continued economic momentum despite various headwinds.

"California's economy powers the nation, and it must be protected," Newsom emphasized while acknowledging both the achievement and the challenges ahead.