China Overtakes Japan; Becomes The World's Second Largest Economy

In an exciting, and somewhat expected turn of events, Japan officially lost its place to China as the world's No. 2 economy. In the second quarter of 2010, Japan's gross domestic product grew at an annualized 0.4 percent, a figure far below the annualized 4.4 percent expansion that Japan saw in the first quarter of 2010. For many, these poor results underscore the reality that the global economic recovery may be hitting some snags. Moreover, the results provide encouragement for China, underscoring the reality that China continues to emerge as the next great global economic superpower; one, set to impact every element of international life from military development to banking.

Meanwhile, in Japan, the country's economic future remains uncertain. Japan's poor economic performance has quickly increased pressure on the administration of Prime Minister Naoto Kan, forcing the government and administration to review their economic stimulus plan. Moreover, the results underscore how closely Japan must continue to monitor the performance of the Yen, particularly against other currencies. After the economic announcement this morning, the Tokyo Stock Exchange immediately dropped, while the key Nikkei 225 index temporarily lost nearly 1.7 percent. Many investors and analysts had expected Japan's economic results to be stronger, particularly because of the role that China plays in the Japanese economic value chain. Unfortunately, these results reinforce the reality that Chinese demand alone may not be enough to sustain Japan or other economic giants through the global uncertainty. Moreover, the change sent a clear warning sign to economic planners that simply focusing on overseas demand is insufficient, particularly for countries like Japan.

While China has surpassed Japan before, many were quick to question whether the change in position was temporary? Personally, after reviewing the economic figures, I find it hard to believe that China will relinquish its position as the number 2 again. China's domestic manufacturing capacity continues to increase. Additionally, by the end of 2010, China's economy will most certainly be larger than Japan's. Currently, China's economy is growing at about 10 percent a year, while Japan's economy is forecast to grow between 2 percent and 3 percent this year. Moreover, Japan's nominal GDP, which isn't adjusted for price and seasonal variations, was worth $1.286 trillion in the April-June quarter compared with $1.335 trillion for China. Sadly, while many within China continue to celebrate, this changing of the guard marks the end of an unsettling couple of decades in Japan. Japan has held second place to the U.S. since 1968, when it overtook West Germany. Following World War II, Japan rose, becoming a global manufacturing and financial powerhouse. Sadly, this "economic miracle" melted away, burned by the massive real estate bubble in the 1980s before imploding collectively in 1991. What followed was a decade of stagnant growth and economic malaise from which the country has never fully recovered. Now, the current administration in Japan faces a long list of daunting problems: a rapidly aging and shrinking population, persistently weak domestic demand, deflation, a strong yen and slowing growth in key export markets. In contrast to Japan, China's growth has been spectacular, with a voracious appetite fueling demand for resources, machinery and products from the developing world as well as rich economies like Japan and Australia.

Photo Credits: David Butow