China passes Japan as No. 2 economy

Beijing's $5 trillion GDP still far behind US's $15 trillion.

By ASSOCIATED PRESS
August 16, 2010 09:03
3 minute read.
A Chinese woman cleans a banner in Beijing

China real estate. (photo credit: AP)

 
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China passed Japan as the world's No. 2 economy in the second quarter Monday, although at $5 trillion in annual GDP China is still far behind the United States' $15 trillion.

Japan has been the world's second-largest economy for 42 years since it passed West Germany in 1968.

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Gross domestic product in China grew at an annualized rate of just 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 is growing at about 10 percent a year while Japan's economy is forecast to grow 3 percent this year.



Japan's nominal GDP, which isn't 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 U.S. 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 so-called "economic miracle" turned into a massive real estate bubble in the 1980s before imploding in 1991.

What followed next 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 and has been key in Japan's recovery from the global recession.

But 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, 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 like Toyota Motor Corp. and Sony Corp. 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.

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