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China surpasses Japan as world's No. 2 economy

By Tomoko A. Hosaka
Monday, August 16, 2010; A10

TOKYO -- Japan lost its place to China as the world's No. 2 economy in the second quarter, as receding global growth sapped momentum and stunted a shaky recovery.

Gross domestic product grew at an annualized rate of 0.4 percent, the government said Monday, far below expectations of 2.3 percent growth in a Kyodo news agency survey.

The figures underscore China's emergence as an economic power that is changing everything from the global balance of military and financial power to how cars are designed. It is already the biggest exporter, auto buyer and steel producer, and its worldwide influence is growing.

China has surpassed Japan in quarterly GDP figures before, but its passing of Japan in the second quarter is likely to mark the period in which the lead became insurmountable.

China's economy will almost certainly be bigger than Japan's at the end of 2010 because of the big difference in each country's growth rates. China's economy is growing about 10 percent a year; Japan's is forecast to grow 3 percent this year.

Japan's nominal GDP, which is not adjusted for price and seasonal variations, was worth $1.286 trillion in the April-to-June quarter, compared with $1.335 trillion for China. The figures are converted into dollars based on an average exchange rate for the quarter.

Japan has held the No. 2 spot, after the United States, since 1968, when it overtook West Germany. From the ashes of World War II, the country rose to become a global manufacturing and financial powerhouse. But its "economic miracle" turned into a huge real estate bubble in the 1980s before imploding in 1991.

What followed next a decade of stagnant growth and economic malaise, from which the country never really recovered. Prime Minister Naoto Kan now faces a long list of daunting problems: a rapidly aging and shrinking population, persistently weak domestic demand, deflation, a strong yen and slowing growth in key export markets.

In contrast, China's growth has been spectacular, its voracious appetite fueling demand for resources, machinery and products from the developing world as well as rich economies such as Japan and Australia. China is Japan's top trading partner and has been key in Japan's recovery from the global recession.

Japan's people still are among the world's richest, with a per- capita income of $37,800 last year, compared with China's $3,600. So are Americans at $42,240, their economy still by far the biggest.

"We should be concerned about per capita GDP," said Kyohei Morita, chief economist at Barclays Capital in Tokyo. China overtaking Japan "is just symbolic," he said. "It's nothing more than that." On a quarterly basis, Japan's GDP -- or the total value of the nation's goods and services -- grew 0.1 percent from the January-March period, the Cabinet Office said.

Consumer spending, which accounts for about 60 percent of GDP, was flat from the previous quarter, the figures showed. Capital spending by companies rose 0.5 percent, while public investment fell 3.4 percent.

"We are now seeing a pause of growth, especially on the domestic side," said Masamichi Adachi, senior economist at JPMorgan Securities Japan.

The outlook for this third is uncertain. Private consumption appears to be solid so far, helped in part by unusually hot weather, Adachi said. But a cooling global economy is dampening exports and production.

A stronger yen, which hit a 15-year high against the dollar last week, also poses a major risk for the country's export-driven economy. Yen appreciation reduces the value of repatriated profits for companies such as Toyota and Sony and makes their products more expensive abroad.

The currency worries led Finance Minister Yoshihiko Noda to say last week that he is closely monitoring foreign exchange rates. Bank of Japan Gov. Masaaki Shirakawa released a similar statement to try to calm markets.

-- Associated Press

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