Chinese economy eclipses Japan's
By Lindsay Whipp in Tokyo and Jamil Anderlini in Beijing
Published: August 16 2010 03:39 | Last updated: August 16 2010 10:46
The Chinese economy eclipsed the Japanese economy in size in the second quarter after Japan posted poor economic growth figures for the period, increasing the chances that China will officially overtake Japan as the world’s second-largest economy for the year.
The Japanese economy grew at an annualised, seasonally-adjusted pace of 0.4 per cent in the three months ended June. That was much lower than the revised 4.4 per cent growth rate recorded for the first quarter and well below the 2.3 per cent expected by economists.
“The symbolism of this moment is far greater than its actual significance,” according to Eswar Prasad, a professor at Cornell University and former head of the IMF’s China division. “In terms of both influence and dynamism, China outstripped Japan a long time ago.”
Japanese economic output in the second quarter was $1,288bn compared with Chinese economic output of $1,337bn, according to a Japanese government official. But the official cautioned that the comparison was inappropriate because China, unlike Japan, does not produce seasonally adjusted data.
China’s quarterly output actually overtook Japan’s in nominal terms in the fourth quarter of last year and since then China has continued to grow rapidly while Japan’s recovery has stalled. Over the first half of 2010, however, Japan maintained its position as the world’s number two economy.
The head of China’s foreign exchange reserve administration last month said China had already overtaken Japan as the world’s second-largest economy. Economists in China point out that while Japan reports detailed and generally accurate economic data, China potentially under-reports its economy by as much as a fifth.
In terms of purchasing power, a more meaningful measure of economic strength, China overtook Japan as the world’s second-largest economy nearly a decade ago. If the European Union is counted as a single economy, then China remains at number three and will stay at that position for some time.
“Using measures such as PPP [purchasing power parity], Japan’s economy is already smaller than China’s,” said Chiwoong Lee, an economist at Goldman Sachs. “Given its potential growth rate going forward it would be just a matter of time before it overtakes Japan anyway [based on market prices]”.While China has made great strides towards replacing Japan as the second biggest economy, on a per capita basis it lags far behind other large economies because of its huge population and it is still regarded as a relatively poor country. Japan’s per capita gross domestic product is still more than ten times larger than China’s $3,600.
Meagre Japanese growth in the second quarter also raises questions about the strength of its economic recovery. By comparison, the US economy expanded at an annualised rate of 2.4 per cent in the second quarter, while Germany grew at 9.1 per cent, its fastest pace since reunification.
The Japanese economy grew more slowly in the second quarter on the back of stalling consumer spending, falling public investment and slower exports. Net export growth slowed but remained solid and was the main contributor to growth for the period.
“Japan is an export driven country and [these figures show that] without fiscal stimulus, there’s no real domestic demand,” said Goldman’s Mr Lee. “Strong exports for Germany is not helpful for Japan, as it suggests that global demand is OK,” he said, noting that the two countries compete to sell machinery to China, with Berlin getting an advantage from the weak euro.
Slower export growth is a challenge for Japanese companies at a time when the yen is trading close to a 15-year high against the dollar, as risk averse investors pile into the currency. Although authorities have stepped up verbal intervention, analysts are sceptical that direct intervention from the finance ministry is likely.
Monday’s economic growth figures could add to pressure on policymakers to find other ways to deal with slowing growth and the impact of the stronger yen on the recovery. Last week, the central bank kept its economic assessment unchanged and did not announce any further easing measures.
Investors were spooked by the GDP numbers and the Nikkei index fell 0.6 per cent to 9,197, closing in on the psychologically important 9,000 level.
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