Thread: China poised to overtake Japan as No.2 economy (US still #1)

China poised to overtake Japan as No. 2 economy for all 2010

By Kathy Chu, USA TODAY

HONG KONG — China is on track to become the world's second-largest economy behind the USA this year, cementing its status as one of the world's superpowers and ending Japan's 40-year reign in the No. 2 spot.

By some measures, China's economy has already overtaken Japan's. Data released Monday shows Japan's second-quarter gross domestic product, before seasonal adjustments, came in at $1.29 trillion compared with China's $1.34 trillion.

While China's GDP has exceeded Japan's on a quarterly basis before — including in the fourth quarter last year — it has yet to extend its dominance for a full year. In 2009, Japan's economic output totaled $5.09 trillion on a nominal basis, before inflation adjustments, compared with China's $4.91 trillion and the USA's $14.26 trillion.

But given Japan's slow economic growth compared with China's double-digit gains, "it's pretty much inevitable that when the final numbers come out, China is going to overtake Japan this year," says Alaistair Chan, an economist at Moody's Economy.com.

On an annualized basis, Japan's economy grew 0.4% the three months ended June 30, the country's Cabinet Office reported Monday, well below analysts' expectations for more than 2% growth.

Weaker-than-expected net exports, along with slower capital expenditures, contributed to Japan's disappointing growth rate in the second quarter, according to Junko Nishioka, chief economist, Japan, for RBS Global Banking & Markets.

Exports could weaken further in the next few quarters with the slowing of the global economy and the yen's appreciation, which makes Japan's products more expensive overseas, says Takahide Kiuchi, chief economist of Nomura Securities in Tokyo.

The country is also dealing with deflation — a general decline in prices — which can stymie consumption and slash corporate profits as consumers wait for prices to fall further before buying.

"Japan's experienced two decades of deflation, while China has experienced two decades of inflation," says Ben Simpfendorfer, chief China economist for RBS. "It makes it easier for China to work off its bad debts through inflation" and to expand its economy.

In full-year 2010, China's economy is expected to grow about 10% compared with 2% to 3% for Japan's economy. Economists say at China's current pace of growth, it could surpass the U.S. as the largest economy in the world as early as 2030.

China has been a major force behind the world's emergence from deep recession, delivering much-needed juice to the U.S., Japan and Europe. Tokyo's latest numbers, however, suggest Chinese demand alone may not be enough for Japan or other economic giants.

"Japan is the canary in the goldmine, because it depends very much on demand in Asia and China, and this demand is cooling quite a bit," said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. "This is a warning sign for all major economies that just focusing on overseas demand won't be sufficient."

Japan has held the No. 2 spot after the U.S. since 1968, when it overtook West Germany. After World War II, Japan rose to become a global manufacturing and financial powerhouse. But its so-called "economic miracle" turned into a massive real estate bubble in the 1980s before imploding in 1991.

What followed was 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 like Japan and Australia. China is Japan's top trading partner.

China's rise has produced glaring contradictions. The wealth gap between an elite who profited most from three decades of reform and its poor majority is so extreme that China has dozens of billionaires while average income for the rest of its 1.3 billion people is among the world's lowest.

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, and the U.S. economy is still by far the biggest.

But the symbolism may be exactly the "wake-up call" Japanese leaders need, said Schulz of the Fujitsu Research Institute. "Japan is always strangely inward looking," he said. "And nobody is doing anything about it."

Japan's people appear resigned to the power shift. A national poll conducted earlier this year by the Asahi, one of Japan's biggest newspapers, showed a roughly equal split between those that believed Japan's fall to No. 3 posed a major problem and those who did not. More than half of the 2,347 respondents said Japan does not need to be a global superpower.

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

The outlook for the third quarter is uncertain. Private consumption appears to be solid so far, helped in part by unusually hot weather, said Masamichi Adachi, senior economist at JP Morgan Securities Japan. But the slowing global economy is weakening exports and production, along with the stronger yen.

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.

http://www.usatoday.com/money/world/201 ... -gdp_N.htm

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, and the U.S. economy is still by far the biggest.