The Chinese economy has surpassed Japan's to become the second largest in the world behind the United States. And, if it maintains the current pace of growth, it could be number one before 2030.
Japan confirmed the slip Monday, as it revealed full-year data that showed its nominal GDP for 2010 came to US$5.4742 trillion. That's shy of the US$5.8786 trillion GDP reported for China in the same year.
Japan had held the number two spot since 1968, when its economy officially surpassed West Germany.
The Japanese economy did post an overall 3.9 per cent increase in 2010, leading the Group of Seven nations that have so far reported their full-year GDP figures, including Germany (3.6 per cent), the U.S. (2.9 per cent) and the U.K. (1.4 per cent).
But Japan's GDP slipped at an annualized rate of 1.1 per cent in the last quarter, on the back of a rising Yen, slowing exports and weakening domestic consumer demand spurred by the end of consumer auto subsidies and a new tobacco tax.
"Growth in China is thought to be running in the neighbourhood of ten per cent, while Japan's grew about 4 per cent and actually shrank in the fourth quarter," BNN's Michael Kane reported Monday morning.
"That's the first contraction in five quarters."
Based on the trend of approximately nine per cent growth, economists have predicted China's economy could become the largest in the world within 15 to 20 years. The U.S. currently sits atop the world economic rankings, with an estimated US4$14.7 trillion GDP in 2010.
"As an economy, we are not competing for rankings but working to improve citizens' lives," Japanese economy minister Kaoru Yosano told reporters after the GDP data was released. "We welcome China's economic advancement as a neighbouring country."
That means, even as China overtakes Japan, the growth is helping it along. As Japan's biggest trading partner, growing Chinese demand for everything from cars to electronics presents a vast market potential.
But capitalizing on the opportunities is complicated, as Japan confronts a record public debt twice the size of its GDP, persistent deflation and a rapidly aging population. Japanese Prime Minister Naoto Kan has pledged to reform the tax and social welfare systems, but he has to pass a record US$1.1 trillion budget first.
And, considering Kan's government is mired in a political funding scandal involving a veteran Democratic lawmaker, overcoming all the challenges will be no mean feat.
"The political situation looks so chaotic," Bank of America-Merrill Lynch in Tokyo chief economist Masayuki Kichikawa told The Associated Press.
"The lack of Prime Minister Kan's leadership is very, very serious, and he is having a kind of identity crisis. It seems he has lost sight of where he stands."
In October, the central Bank of Japan lowered its key interest rate to virtually zero per cent, and unveiled a US$61 billion fund to buy financial assets in an effort to reverse deflation and lift the economy.
Last month, Standard & Poor's downgraded Japan's credit rating for the first time in 9 years.
With files from The Associated Press
