California economy passes Japan’s as 4th largest

By one measure, California’s economy is thriving. By other metrics? Not so much.

The Golden State’s economy reached another milestone last year by jumping ahead of Japan to become the world’s fourth-biggest economy, according to new data from the International Monetary Fund.

But deep inequality is widening, including in Silicon Valley, where inequality has grown at twice the clip of the rest of the U.S. Plus, President Donald Trump’s steep tariffs are expected to hammer local businesses small and large alike, should the president keep them in place.

“This is a piece of history that is contradicted by current events now,” said Stephen Levy, senior economist at the Center for Continuing Study of the California Economy in Palo Alto.

California has long been a hotbed of Fortune 500 companies and diverse industries from agriculture to manufacturing and film. Its status as an economic powerhouse strengthened last year when the state’s gross domestic product — the value of all goods and services produced here — climbed to $4.1 trillion, according to the IMF. That was higher than Japan’s $4.03 trillion, where economic growth has stagnated for the last decade.

The jump in rankings is California’s first since 2018, when the Golden State surpassed the size of the United Kingdom’s economy. Gov. Gavin Newsom, who frequently highlighted California’s former status as the world’s fifth-largest economy during public appearances, championed the milestone on Wednesday.

“California isn’t just keeping pace with the world — we’re setting the pace,” the Democrat said in a statement. “Our economy is thriving because we invest in people, prioritize sustainability, and believe in the power of innovation.”

Newsom is widely expected to run for president in 2028. If he does, the state of California’s economy under his tenure will be heavily scrutinized.

California’s economy continued to grow at a fast clip of 6% in 2024, according to data and Newsom’s office. The top three economies in the world all grew at slower rates: 5.3% in the entire U.S., 2.6% in China and 2.9% in Germany.

However, the economy of Germany, a powerhouse of manufacturing and engineering, was still about $500 billion larger than California’s last year. And India, one of the fastest growing economies in the world, is likely to outpace Japan and California next year, according to Levy.

Gross domestic product, a useful measure of growth widely used by economists, doesn’t take into account income inequality or unemployment. California had the highest poverty rate of any U.S. state last year, CalMatters reported.

In Silicon Valley, the gap between rich and poor has widened as a tech-driven economy fails to deliver a living wage for almost a third of families — while also producing 56 billionaires, this news organization reported in March. And just a year ago, California’s unemployment rate was the largest of any state.

Levy said he doesn’t blame Newsom for California’s economic challenges and expects the state economy to shrink next year if Trump’s tough tariffs stay in effect. California’s economy is heavily dependent on trade with China, Canada and Mexico, three countries that Trump has hammered with import taxes in an escalating trade war.

Earlier this month, California sued the federal government over tariffs, challenging President Donald Trump’s use of emergency powers to enact broad-sweeping tariffs. Newsom has also asked foreign nations to exempt California from retaliatory tariffs, which experts say is unlikely.