Japan retains position as world's second biggest economy

JAPAN yesterday held on by a whisker to its title as the world's second biggest economy as GDP figures revealed a late surge in the fourth quarter of last year.

The land of the rising sun managed to avoid being overtaken by China for yet another quarter as its economy exceeded expectations to clock 1.1 per cent growth in the closing three months of 2009. By contrast, the UK economy expanded 0.1 per cent during the same period.

The late push in Q4 took total Japanese GDP growth for 2009 to $5.1 trillion (3.26tn) beating China's output of $4.9tn.

Despite the encouraging performance, economists remain sceptical that Japan will be able to hold out against the "rising dragon" economy of China for much longer. They insist it is only a matter of time before it loses its prized No.2 spot in the economic pantheon behind America – a privileged position it has enjoyed for more than four decades.

Takuji Okubo, chief economist at Societe Generale in Tokyo, said the Japanese people are also pessimistic about the economy's chances of holding out against their great rival.

Okubo expects China to overtake Japan later this year. "The Japanese population has become relatively pessimistic about the country's outlook," he said, "so I don't think they will be surprised when Japan falls to number three."

The late surge in the fourth quarter was put down to government stimulus both at home and abroad, which gave many Japanese the confidence to go out and spend. Corporate investment also staged a revival and the closing months of 2009 marked the third consecutive quarter of GDP growth.

However, total growth for 2009 was down 3 per cent – a record slump. Economists expect consumer spending will decelerate this year, exacerbating Japan's long-term structural problems of falling prices and wages and a declining population and tax base.

Pressure is mounting on the Bank of Japan (BoJ) to act against a mounting deflationary threat as many Japanese remain haunted by the "lost decade" of the nineties.

Tetsufumi Yamakawa, chief economist at Goldman Sachs said: "While such deflationary tendencies persist, the need for a policy response centred on the BoJ is increasing, not diminishing."

Howard Wheeldon, senior strategist at BGC Partners in London, said: "Deflation still reigns in Japan along with all its inherent problems."

Japan's fourth-quarter figures compare with a 0.1 per cent expansion in the eurozone during the same period – a figure economists described as "desperately disappointing" as the German economy stagnated and Italy contracted anew.