India Replaces Japan as 4th Largest Economy. What to Trade?

The global economic landscape is undergoing a profound transformation. A significant recent development is that India has surpassed Japan to become the world’s fourth-largest economy. This milestone was achieved due to a combination of India’s strong economic growth and Japan’s economic slowdown.  India’s GDP crossed the $4 trillion mark in May 2025, overtaking Japan and leading to a shift in rankings. This momentous shift has far-reaching implications for the finance markets, particularly for forex trading and the dynamics of currency pairs like the USD/JPY.

India’s Economic Ascendancy and its Global Ripple Effect

India’s journey from the 10th largest economy in 2014 to the 4th in just over a decade is a testament to the nation’s sustained economic momentum. Factors like strong domestic consumption, increasing digitalisation, a burgeoning manufacturing sector, a vast and skilled workforce, and an expanding credit market have fuelled this remarkable growth. While India’s per capita GDP remains comparatively low due to its large population, its overall economic size and growth rate are undeniably influential.

The rise of the Indian economy has significant implications for its major trading partner, the EU. The EU is the second-largest destination for Indian exports, accounting for trade worth €120 billion in 2024, or 11.5% of India’s total exports. India and the European Union are actively working towards finalising a Free Trade Agreement (FTA) by the end of 2025. Both sides are committed to building a comprehensive and mutually beneficial trade partnership, with the FTA expected to cover various aspects like trade in goods and services, investment and sustainable development. 

With the FTA, India could be a viable and potentially valuable trading partner for the EU, offering an alternative to the US, particularly in the context of global trade uncertainties and supply chain diversification.

On the other hand, India and Japan are also significant trading partners under the Comprehensive Economic Partnership Agreement (CEPA). Bilateral trade between the two countries has been growing at a CAGR of around 5.63% between 2018-19 and 2022-23. In FY2023-24, Japan’s bilateral trade with India totaled $22.85 billion. Indian exports to Japan include refined copper, precious metal compounds and motor vehicles, while imports include residual chemical and allied products, copper and products made of copper, and organic chemicals.

As India’s purchasing power increases, it becomes an even more attractive market for European exports, from luxury goods to high-tech machinery. This could lead to increased trade volumes and strengthen economic ties. Plus, as a major emerging market, India’s economic stability and growth will increasingly influence global investor sentiment, which can indirectly affect the euro and Japanese yen’s stability. A thriving Indian economy could attract capital away from traditional markets, if perceived returns are higher in India.

Impact on Trading the Japanese Yen and Euro

Traditionally, the US dollar (USD) has been the undisputed king of safe-haven currencies, sought after during times of global economic uncertainty and geopolitical tension. However, the Japanese yen (JPY) has also long held a reputation as a safe haven, particularly given Japan’s persistent current account surpluses, low interest rates, and deep, liquid financial markets. So, the question arises: with India’s growth and the shifting global economic power, will the JPY’s safe-haven status be further solidified, perhaps even becoming a more prominent alternative to the USD?

The answer is complex. The JPY’s safe-haven appeal often stems from its unique characteristics:

• Repatriation Flows: Japanese investors hold significant foreign assets. In times of global stress, these assets are often repatriated, leading to rising JPY demand.
• Low-Interest Rates: The Bank of Japan’s (BoJ) prolonged period of ultra-low interest rates has made the JPY a popular funding currency for carry trades. When risk aversion increases, these carry trades unwind, leading to JPY buying.

Meanwhile, the USD declined 7.63% over the 12 months to June 25, 2025. Concerns regarding sticky inflation, the tariff-led trade wars and the Fed’s continued hawkish stance are impacting investor sentiment on the greenback. Those looking to diversify to alternate safe havens could find the JPY a viable choice.

Trading the USD/JPY

The USD/JPY pair is significantly influenced by interest rate differentials between the US and Japan, as well as risk sentiment. With India’s growth, the dynamics could subtly shift. If the Fed maintains a hawkish stance while the BoJ remains dovish or only gradually tightens, USD/JPY is likely to see upward pressure and vice versa. This makes it crucial to closely monitor central bank statements and economic data from both economies to strengthen your forex trading strategy.

Also, while the JPY is a safe haven asset, a general risk-on environment, partially fuelled by India’s growth, might see the JPY weaken as investors seek higher returns elsewhere, leading to USD/JPY appreciation. Conversely, heightened global uncertainty, especially if it doesn’t directly impact the US, could see the JPY strengthen, pushing the forex pair lower.

Breakout trading and trend-following strategies are popular for the USD/JPY. Moving averages, RSI and MACD are commonly used to confirm trends and identify entry/exit points.

Trading the EUR/USD

The EUR is the second most traded currency. With global economic growth and India’s expansion, the popularity of the currency could rise. Plus, if international trade increases, it would benefit the Eurozone, strengthening the EUR against the USD. Conversely, there could be a less direct impact on the euro if there are geopolitical tensions in Asia that involve India. This would have ripple effects on global risk sentiment, potentially leading to a flight to safe havens like the US dollar, weakening the EUR/USD.

Traders should watch for any indirect inflationary pressures in the Eurozone stemming from increased global demand. This could prompt the European Central Bank (ECB) to adopt a more hawkish stance, supporting the EUR. On the other hand, a slowdown in global demand could lead to disinflationary pressures and a weaker euro.

Range trading, breakout trading and trend following are common strategies for the EUR/USD. The pair often exhibits clear support and resistance zones. Traders can look for reversals at these levels or enter trades on confirmed breakouts. Fundamental analysis is crucial for understanding the broader direction.

Successful forex trading in this evolving landscape will require a keen understanding of both fundamental economic shifts and robust technical analysis, along with stringent risk management.

To Sum Up

• India has surpassed Japan as the world’s fourth-largest economy.
• India is an important trading partner for the EU and Japan.
• India’s growth could fuel demand for exports from the EU and Japan, benefiting both economies.
• The Japanese yen is a safe haven currency and could be a viable alternative to the USD.
• Breakout trading and trend-following are popular trading strategies for the USD/JPY.
• The EUR is the second most traded currency and global growth could increase the attractiveness of the currency.
• Range trading, breakout trading and trend following are common strategies for the EUR/USD.

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