Tue, Feb 15, 2011 - Page 10 News List

China becomes world’s No. 2 economy

LEAPING FORWARD:Although China’s economy first eclipsed that of Japan in the second quarter of last year, Japan is still about 10 times richer on a per capita basis

AFP, TOKYO

Japan lost its 42-year ranking as the world’s second-biggest economy to China last year, with data out yesterday showing a contraction in the last quarter due to weak consumer spending and a strong yen.

While Japan was expected to fall behind a surging China last year, the data underlined the weak state of a Japanese economy burdened by deflation, soft domestic demand and pressured by the industrialized world’s biggest debt.

“It is difficult for the deflation-plagued Japanese economy to achieve self-sustained growth,” said Naoki Murakami, chief -economist at Monex Securities.

While China’s leap forward reflects a shift in economic power as the country transforms itself from poverty-hit communist state to global heavyweight, it highlights the need for shrinking Japan to energize its economy, analysts said.

Japan’s post-war “economic miracle” put it at No. 2 behind the US for more than four decades, but stagnation after the Japanese property bubble burst in the 1990s helped put China on course to supplant its neighbor.

However, Japan remains about 10 times richer on a per-capita basis, top government spokesman Yukio Edano said. GDP per head in Japan is about US$42,000, economists say. Predictions vary as to when China may overtake the US as the No. 1 economy, but it should happen by 2025, according to estimates by the World Bank, Goldman Sachs and others.

Japan’s real GDP slipped by an annualized 1.1 percent in the October-December quarter as the expiration of auto subsidies hit car sales, a new tobacco tax sapped cigarette demand and a strong yen hurt exports.

In contrast, China grew nearly 10 percent in the same period. While Japan’s first contraction in five quarters was not as severe as forecasts of a 2.4 percent slide, the data is subject to constant revision.

The economy grew 3.9 percent last year, its first annual growth in three years, but this was not enough to keep it ahead of surging China.

Nominal GDP of US$5.474 trillion last year put Japan behind China’s US$5.879 trillion, the data showed. China first eclipsed Japan in the second quarter. Despite Japan crawling out of a severe year-long recession in 2009, its recovery remains fragile with deflation, high public debt, an ageing population and a strong yen all concerns for policymakers.

Pressure is on Japanese Prime Minister Naoto Kan, who has seen his approval ratings tumble as his government looks to boost the economy without deepening the debt amid a legislative impasse over a US$1.1 trillion budget for next fiscal year.

Last month Standard & Poor’s cut Japan’s credit rating one notch to AA- from AA, saying the government lacked a “coherent strategy” to ease a debt running near 200 percent of GDP, the highest of any developed nation.

Nearly a third of government spending is being swallowed up by a social security system catering to a rapidly graying society, Standard & Poor’s said, with that ratio set to rise without reforms as Japan continues to age.

Kan’s center-left government has prioritized social security -reform and a tax system overhaul, but the opposition has so far refused to begin talks on the issue.

Private consumption, accounting for about 60 percent of Japan’s GDP, slid by 0.7 percent quarter-on-quarter in October-December as subsidies for green car purchases expired and as cigarette sales were dented by Japan’s biggest ever tobacco tax hike.

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