Japan admits it has been overtaken by Chinese

Japan yesterday confirmed that China's economy surpassed its own as the world's second largest in 2010 and said a late-year downturn marked the first quarterly contraction in more than a year.

Japan's real-term GDP expanded 3.9 per cent in the calendar year - the first annual growth in three years - but it wasn't enough to hold off a surging China.

Nominal gross domestic product (GDP) last year came to just over $5.47 trillion (3.4 trillion), less than China's total of almost $5.9 trillion, the Japanese cabinet office said.

GDP shrunk at an annualised rate of 1.1 per cent in the October-December quarter, a sharp reversal from a revised 3.3 per cent expansion in the third quarter, the government in Tokyo added.

A slowdown in exports and weaker consumer demand at home led to the unsurprising downturn, which is expected to be temporary.

The result was better than Kyodo news agency's average market forecast of an annualised 2.2 per cent decline.

China was acknowledged last year as having grown to the world's second-largest economy, but the Japanese data confirming the change was not available until yesterday.

The switch underscores the nations' stark contrasts: China is growing rapidly and driving the global economy, while Japan is struggling with persistent deflation, an ageing population and ballooning public debt.

Prime minister Naoto Kan has pledged to revive the economy and make major reforms in the country's tax and social welfare systems.

His approval ratings are eroding quickly, however, as voters question his government's ability to lead the country through its pressing problems.

At its current rate of growth, analysts see China replacing the United States as the world's largest economy in about a decade.

Commenting on the latest economic data, Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute, said: "The data confirms that the economy entered a lull on a downturn in private consumption, but recent monthly economic indicators such as output and exports show it is unlikely that the lull will be prolonged."The economy will continue to depend on external demand for growth, as domestic demand is likely to be capped by subdued income growth and the anticipated negative impact from the expiry of subsidies for energy-efficient electrical appliances." Economics minister Kaoru Yosano said Japan needed to make the most of China's growth to boost its own fortunes, as it increasingly relies on demand from its Asian neighbour.

"The fact that China's economy is booming is welcome news for Japan as a neighbouring country," he said.

"We want to deepen the amicable economic relationship between Japan and China."

Japan's shipments to mainland China accounted for 19.4 per cent of its overall exports last year, making it the number one destination for Japanese goods, followed by the US at about 15.4 per cent.

As the Japanese economy remains mired in stubborn deflation, the nation's central bank is in no position to roll back its comprehensive easing programme any time soon. That is in stark contrast with policymakers in other parts of Asia, Europe and elsewhere where the focus is shifting from supporting sustainable recoveries to controlling inflation.