Crouching tiger pounces: China's economy leaps Japan

China has overtaken Japan as the world’s No. 2 economy, knocking its neighbour off a perch it has held for 42 years. New data released Monday revealed the weakened state of the Japanese economy, burdened by deflation and low domestic consumer spending.

Reuters

Predictions vary as to when China may overtake the United States as number one economy, with estimates by the World Bank saying it should happen by 2025.

Analysts say that while China's leap forward is testament to its success in transforming itself into a global heavyweight, the move also highlights the need for shrinking Japan to energise its economy.

"It is difficult for the deflation-plagued Japanese economy to achieve self-sustained growth," said Naoki Murakami, chief economist at Monex Securities.

Japan’s first contraction in five quarters, in the October-December period, is attributed to pressure from the industrialised world's biggest debt, along with a local tobacco tax sapping cigarette demand and a strong yen hurting exports.

Japan crawled out of a severe year-long recession in 2009, but its recovery remains fragile with deflation, high public debt and an ageing population all big worries.

The country’s economy grew 3.9 percent in 2010 in the first annual growth in three years – but it wasn’t enough to keep it ahead of surging China.

Nominal GDP of $5.474 trillion in 2010 put Japan behind China's $5.879 trillion.

But despite its drop in the economy rankings, Japan is still about 10 times richer than China on a per-capita basis. Economists put GDP per head in Japan at around 42,000 dollars.

Pressure is on Prime Minister Naoto Kan, who has seen his approval ratings tumble as his government looks to boost the economy without deepening the debt running near 200 percent of GDP.

The government is faced with a legislative impasse over a $1.1 trillion budget for the next fiscal year.

Last month Standard & Poor's cut Japan's credit rating, saying the government lacked a "coherent strategy" to ease its debt, the highest of any developed nation.