Japan's economy lags behind China as growth slows


Posted at Aug 16 2010 05:45 PM | Updated as of Aug 17 2010 01:45 AM

TOKYO, Japan - Japan's economy was outpaced by China in the second quarter on nominal terms, data showed Monday, as sharply weaker than expected growth triggered fresh fears the global recovery is losing steam.

As cooling exports and flat domestic consumption hit Japan's growth in April-June, the data pointed to the looming prospect of China overtaking Japan as the world's second-largest economy.

"The economy is levelling off," said Keisuke Tsumura, parliamentary secretary of the Cabinet Office.

Japan's real gross domestic product grew by an annualised 0.4 percent in the quarter, down from a revised 4.4 percent in the previous three months, missing forecasts of 2.3 percent growth from a Dow Jones Newswires economists' poll.

On a quarterly basis, growth was at 0.1 percent, down from a revised 1.1 percent in the previous quarter -- the slowest pace in three quarters.

"It was a negative surprise," said Yoshiki Shinke, Dai-Ichi Life Research Institute senior economist. "Such figures were very much unexpectedly weak."

The data pose a challenge for Prime Minister Naoto Kan's government, which must balance a fragile economy with an agenda focused on the need to cut the industrialised world's biggest public debt, at nearly 200 percent of GDP.

However, "today's disappointingly weak data make it even less likely that the government will move quickly to tackle the huge public debt", said Julian Jessop of Capital Economics in a research note.

Private consumption, a key driver of the economy, was flat after growing 0.5 percent in the previous quarter.

Net exports contributed to 0.3 percent of GDP from 0.6 percent previously.

Many analysts say 2010 is the year China will replace Japan as the world's second-largest economy, with data showing that while Japan stayed ahead of its Asian rival in the first half, it fell behind in April-June.

In just three decades since opening its doors to foreign investment, China has leapfrogged Britain, France and Germany on its economic ascent and, along the way, won developing countries a bigger say in the World Bank and International Monetary Fund.

On a nominal basis, Japan's second quarter GDP was smaller than China's, at 1.288 trillion dollars compared with 1.336 trillion dollars, according to the government.

In the first half, Japan's nominal gross domestic product was at 2.578 trillion dollars, slightly higher than China's 2.532 trillion dollars, the cabinet office said.

"We expect the Japanese economy to fall into a lull, as exports continue to weaken," said Hiroshi Watanabe, senior economist at Daiwa Research Institute.

In June, Japan's unemployment rate edged higher to 5.3 percent, while production of automobiles and electronic gadgets slipped, amid signs that an export-driven recovery may be stalling as stimulus measures wane.

Shipments of cars, gadgets and components have been crucial in offsetting weaker demand at home, but concern is mounting that Japan may be hit by the effects of fragile eurozone and US demand.

Deflation and weak domestic demand have long burdened Japan, as consumers tend to put off purchases in the hope of further price falls.

The planned expiry in September of government incentives to purchase cars may also weigh on production for the domestic market just as the overseas climate worsens, analysts say.

The sector is also anxious about the strength of the yen, which recently touched a 15-year high against the dollar, prompting verbal intervention from government officials.

The safe-haven currency has strengthened beyond the trading levels assumed earlier by many exporters, as investors seek a refuge from dollar and euro volatility, costing companies tens of billions of yen in repatriated profits.

"It will take time for the higher yen's effects to show in exports data," said Shinke. "But over six months to a year, it will pressure exports."

In Tokyo the Nikkei 225 index closed 0.61 percent lower.