China’s economy overtakes Japan

Japan’s “lost decade” has left a lasting impact

Japan has lost its spot as the world’s second-biggest economy to China, figures out later are expected to show.

Fourth-quarter and full-year gross domestic product figures will be released by Japan at 0850 in Tokyo on Monday (2350 GMT Sunday).

Japan’s economy has been hit by a drop in exports and consumer demand, while China has enjoyed a manufacturing boom.

At its current rate of growth, analysts see China overtaking the US as the world’s top economy in about a decade.

“It’s realistic to say that within 10 years China will be roughly the same size as the US economy,” said Tom Miller of GK Dragonomics, a Beijing-based economic consultancy.

There has been a debate over when exactly Japan was overtaken as the world’s second biggest economy, with some analysts saying it happened in the third quarter of last year.

China has some of the biggest and fastest growing cities in the world

However, the full-year figures should give a more concrete comparison.

According to the International Monetary Fund, Japan’s gross domestic product (GDP) was $5.39 trillion (£3.3 trillion) in 2010. China’s preliminary figure shows its GDP last year was $5.75 trillion.

Japan’s economy is expected to have grown by about 2.8% in 2010, according to the IMF. China’s growth is expected to have hit a much more powerful 10% when the revised figures are released.

‘Quite stunning’

The majority of China’s growth has been funded by investment in manufacturing and the expansion of China’s domestic industries and infrastructure.

Driving this has been a surge in exports after China became a production hub for multinational brands that wanted to benefit from low labour costs, and expanding road and rail links.

“There was an emphasis on infrastructure,” said Duncan Innes-Ker of the Economist Intelligence Unit (EIU) in Beijing.

“They were building way ahead of where people thought the demand would be. And because the infrastructure was there, companies went there.”

As China’s economy grew, it created new jobs that saw people leave rural areas and farming, and pursue higher-paying work in the urban centres.

“The key thing was the enormous shift from people working in fields to moving into cities,” said Mr Miller of consultancy GK Dragonomics.

“The urbanisation is a key structural change over the last 30 years.”

At the same time, investment into China from abroad picked up, helping push the value of stocks and property to new highs.

“The level of investment in China is quite stunning,” said the EIU’s Mr Innes-Ker.

“In 2009, we saw almost 25% growth, year-on-year, in real terms of investment. That is unprecedented for a large economy.”

‘Lost decade’

By contrast, Japan has been struggling to come to terms with what many analysts call a “lost decade”.

In the 1980s Japanese products such as electronics and vehicles were in demand globally, and at its peak the economy was growing at more than 7% annually.

But this in turn was fuelling a spending and borrowing spree, and by the 1990s bubbles had developed in the stock and property markets.

“Land value was unrealistic and the government tried to build its way out, debt ratcheted up and the productivity of the economy really suffered,” said the EIU’s Mr Innes-Ker.

Today, there are signs that Japan has manage to turn its economy around, but it is still dealing with the impact of an ageing population and low consumer demand.

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By the late 1980s Japan’s economy was a powerhouse, with growth peaking at 7.1%. It was being driven by booming electronics and auto industries, and billions of dollars invested in the financial markets. Japanese manufacturers benefited from a relatively cheap labour force. China’s economic success began in the 1980s. At the start of the decade the household responsibility system was changed to allow families to keep their surplus grain. In 1994, the pricing system was changed to allow freer price movements. These steps and others started opening up China’s economy. By the 1990s, Japanese land was severely overvalued. Property prices were unrealistically high and there was lots of speculation in the stock and property markets. Then the bubble burst, causing a massive market collapse. Investment started to flow out and brand Japan took a beating. By the mid 1990s China was well on the path of opening up its economy. Exports were flooding out and China was given the title of “the world’s factory”. Taking advantage of its huge population, China began to move up in the rankings of the world’s top economies. China’s growth is forecast to slow, but even so economists say it is on track to overtake the US as the world’s No.1 economy in about 10 years. And while it needs to control inflation and prevent asset bubbles most economists agree the economy’s underlying structure is sound, and growth sustainable.

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Chinese manufacturing power may create problems for the economy in coming years

Even so, most economists agree that while China as a whole is growing, and the average person is getting wealthier, comparing only the size of its economy to Japan’s does not paint an accurate enough picture.

“GDP per head in China is about $4,500, but in Japan it’s about $40,000 per head,” said Mr Miller.

“Most people in China are still poor, more people live in the countryside than in cities. The average Japanese person is much much richer than the average Chinese person,” he said.

Tougher times?

And while China may be moving up the economic power table, it is not immune from problems.

Its rapid rate of expansion is accelerating inflation, and analysts are warning of a possible bubble brewing in the property market.

The government, meanwhile, is facing growing international criticism of its currency policy and is accused of keeping the yuan undervalued.

Faced with these problems, economists expect China’s economic growth to slow markedly.

“China ought to keep on growing for a good few years but growth will come down a little bit to 7-8%,” said Mr Miller from GK Dragonomics.

“The bigger you are, the harder it is to keep growing really really fast.”

But even at a slower pace, China should keep marching towards the spot of the world’s biggest economy.

This article is from the BBC News website. © British Broadcasting Corporation, The BBC is not responsible for the content of external internet sites.