Japan still number two economy ahead of China

Japan narrowly retained its title as the world's number two economy in 2009 ahead of China, extending a recovery from a brutal recession with a robust fourth-quarter performance, data showed Monday. But surging China came close to unseating its neighbour from the position it has held for more than 40 years, after the Japanese economy contracted at the fastest pace on record last year, battered by a plunge in exports. Japan's economy grew 1.1 per cent in October-December from the previous quarter, for an annualised pace of 4.6 per cent, as corporate capital spending increased for the first time in almost two years, the government reported. Investors, however, reacted cautiously to the figures, after the government downgraded its estimate for the third quarter to show zero growth. The Nikkei-225 stock index ended the day 0.78 per cent lower. "Concerns about a double-dip recession eased a little. We are seeing light shining between the clouds, but can't be off guard," Finance Minister Naoto Kan told reporters. Japan's gross domestic product (GDP) dived last year as exports and factory output collapsed during the global economic downturn. The severe contraction left Japan only just ahead of China as the world's second-largest economy. Japan posted nominal GDP of 5.085 trillion dollars last year, based on the average dollar-yen exchange rate for 2009. China reported last month nominal GDP of about 4.9 trillion dollars for 2009, after its economy grew a blistering 8.7 per cent in 2009. With China expected to enjoy another year of strong growth in 2010, Japan risks ending this year in third place worldwide as it struggles to cope with renewed deflation and a shrinking population, analysts said. "China's population is 10 times larger than that of Japan. It's quite natural for China to overtake Japan in the face of rapid globalisation," said Toru Shimano, economist at Okasan Securities. Without China's boom, Japan's economy would be even more sluggish given that the two are major trading partners, analysts said. China has achieved remarkable growth since opening up its economy 30 years ago, growing at an average of more than nine per cent each year in the three decades since 1978 -- three times the world average. Comparisons between the two countries are complicated by exchange rate fluctuations. If the yen weakens further, that could hasten China's ascent to world's number two behind the United States. Beijing's policy of keeping the yuan weak, with a peg against the greenback, has helped China to ride out the global economic downturn relatively well, but has also pushed back the day when it will overtake Japan. Japan's economy staged a stunning recovery from the ashes of World War II and in the 1980s it was widely predicted to outstrip the United States. But it suffered a decade of stagnation after an asset price bubble burst in the early 1990s. The country plunged back into recession in 2008 as its exports collapsed due to a severe global downturn. It returned to growth in the second quarter of 2009, exiting a year-long downturn. But the recovery remains fragile with falling consumer prices, high public debt and weak domestic demand all major concerns for policymakers. The GDP deflator — a broad indicator of price trends — fell by a record 3.0 per cent in October-December from the previous year. Finance minister Kan said Monday he would soon start discussions on whether to raise the politically sensitive sales tax. But he reiterated a government pledge not to increase the levy — now at five per cent — before the next lower house election, due by August 2013. Many analysts see a hike as inevitable to rein in the soaring public debt.