By ANDREW MONAHAN

TOKYO — Japan ceded its spot as the world’s second biggest economy to China in 2010, with a contraction in the fourth quarter as the strong yen contributed to an export slump, the end of auto subsidies depressed car purchases and a new tobacco tax hit cigarette sales.

 

The Japanese economy’s fall from its 42-year reign in the number two spot behind the U.S. comes as pressure is mounting on Prime Minister Naoto Kan to halt further decline. But merely achieving moderate growth ahead may prove difficult as the government grapples with a staggering public debt, prolonged deflation and low approval ratings.

 

The Long Rivalry

China passed Japan in 2010 to become the world’s second-largest economy after the U.S. Compare the two economies over the past 50 years.

http://online.wsj.com/article/SB10001424052748703361904576142832741439402.html?mod=djemalertNEWS#

 

Real gross domestic product contracted 1.1% in annualized, seasonally adjusted terms in the October-December period, slowing sharply from a revised 3.3% expansion in the previous period, government data showed Monday. The result marks the first contraction since a revised 1.9% pull back in July-September 2009. It compares with the median forecast for a 2.4% contraction in a poll of economists by Dow Jones Newswires. In on-quarter terms, real GDP contracted 0.3%, compared with revised 0.8% expansion in the July-September period.

 

Japan‘s nominal GDP for 2010 was 479.223 trillion yen, or $5.474 trillion, falling below the $5.879 trillion figure for China in the same year. While China’s economy has several times in the past surpassed Japan’s based on quarterly data for the two countries, Monday’s reading marks the first time that China has done so on a full-year basis, the standard generally used for global rankings.

 

China‘s success story overshadows the fact that Japan’s economy expanded for all of 2010. Growth in the first three quarters of the year meant that even with the poor showing in the fourth quarter, Japan’s real GDP for the full year expanded 3.9% on year.

 

While China overtakes Japan, it is also helping it along. Japanese exports to China hit a record 13.087 trillion yen in 2010. The rapidly growing Chinese market for everything from cars and high-tech electronics to beverages is galvanizing corporate Japan. Naoki Izumiya, president of the beer-maker Asahi Breweries Ltd., said last week that the company’s business in China has “increasing potential and appeal,” a remark that rings true for various Japanese firms.

 

Continued growth in the Chinese economy as well as further pickup in the U.S. is expected to help Japan’s economy bounce back in the first quarter of 2011.

 

Some analysts said that the numbers were stronger than expected but did not necessarily bode well for the economy going forward since part of the rise was due to higher inventories, which could result in a slowdown in production if consumption remains weak.

 

Mizuho Research and Consulting senior economist Norio Miyagawa said he now expects full-year 2011 growth of less than 2%. “Japan’s weak consumer spending will likely keep weighing on the economy,” he said.

Economy Minister Kaoru Yosano put the issue of China’s growing economic clout growth in a positive light, saying that its high growth rate benefits all of Asia. “We are pleased to see China’s economy rapidly developing,” he said in comments to reporters soon after the figures were announced.

 

A rebound can come none too soon for Japanese workers. Smaller winter bonuses dragged down earnings late last year. The jobless rate hovers around 5% as firms hesitate to ramp up hiring, except for contract positions that pay less and offer fewer benefits.

 

The bleak jobs situation is hurting personal spending. Many young Japanese don’t enjoy the kind of job stability and wage growth their parents did, meaning new cars and other high-priced goods are out of reach for many in the younger generation.

 

Consumer spending, which accounts for nearly 60% of Japan’s GDP, was down 0.7% on quarter, compared with a revised 0.9% rise in the previous quarter.

 

Government purchasing incentives for fuel-efficient cars expired in September, weighing on car sales in the fourth quarter.

 

Consumption also suffered as smokers bought fewer cigarettes, after a tax introduced in October pushed up prices.

 

The falls overwhelmed a jump in sales of flat-panel televisions and other electronics covered by an incentive program for environmentally friendly products that was scaled back in December.

 

Domestic demand contributed 0.2 percentage point to the rate of GDP contraction, after adding a revised 1 percentage point to the GDP expansion in the previous quarter.

 

External demand, or exports minus imports, contributed 0.1 percentage point to the GDP contraction, after subtracting 0.1 percentage point from the GDP expansion in the previous quarter.

 

Exports fell 0.7% from the previous quarter, due in part to the strong yen, after rising a revised 1.5% in the previous period. The contraction was the first since exports slid in the January-March quarter of 2009 as trade plummeted amid the global financial crisis.

 

The fall in exports came as the yen surged during the period, making Japanese goods more expensive overseas and eating into profits sent back to Japan. Tokyo intervened in currency markets for the first time in more than six years in September, but the attempt failed. In early November, the dollar sank to 80.21 yen, its lowest level in fifteen years and near the post-World War II record low of 79.75 yen.

 

Capital expenditure, which accounts for 16% of GDP, rose 0.9% on quarter, slowing from a revised 1.5% gain in the previous quarter.

 

Business investment will likely remain sluggish for the first half of 2011, as concerns over any renewed yen strength continue to influence spending plans, economists said.

 

“Companies have been rather hesitant to increase capex at home until confirming the stability of foreign exchange rates,” said Credit Agricole’s chief Japan economist Susumu Kato. The dollar was at 83.23 yen.

 

Despite some easing recently in price falls, entrenched deflation continues to weigh on business investment by pushing up real borrowing costs and prompting consumers to delay purchases as they wait for prices to fall further. That is one reason firms have remained reluctant to spend more despite generally strong earnings, economists say.

 

The GDP deflator, the broadest measure of price trends, was minus 1.6 in the quarter, compared with a revised minus 2.1 in the July-September period.

 

One bright spot during the period was real estate. Private residential investment increased 3.0% on quarter, higher than a revised 1.8% rise in the previous period. Discounted mortgage rates and a government purchasing incentive scheme for environmentally friendly properties have encouraged more people to buy homes despite anemic growth in income.

 

–Kazuhiro Shimamura, Takashi Nakamichi and Takashi Mochizuki contributed to this article.

Source: WSJ