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Updated: February 15, 2010 17:18 IST

Japan still world’s Number two economy

AP
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Japanese Finance Minister Naoto Kan, takes a dog sled ride just on the outskirts of the northern community of Iqaluit, Nunavut. File photo: AP.
Japanese Finance Minister Naoto Kan, takes a dog sled ride just on the outskirts of the northern community of Iqaluit, Nunavut. File photo: AP.

Japan held its title as the world’s second-biggest economy after fourth-quarter growth beat expectations and kept the country just ahead of a surging China.

Real gross domestic product grew at an annual pace of 4.6 percent in the October-December period, the government said on Monday. The average forecast of 15 economists polled by The Associated Press was annualized growth of 3.4 percent.

Japan’s nominal GDP for the 2009 calendar year came to about $5.1 trillion, topping China’s domestic output of $4.9 trillion.

On the surface, the results reflect how Japan has benefited from government stimulus measures at home and around the world, which have bolstered global trade and persuaded Japanese households to boost spending. GDP, or the total value of the nation’s goods and services, has climbed now for three straight quarters and looks unlikely to retreat this year.

Consumer spending, which accounts for about 60 percent of the economy, rose 0.7 percent from the previous quarter as shoppers took advantage of incentives on cars and home appliances. More confident companies are also starting to invest in factories and equipment.

“There is some brightness breaking through the clouds,” Finance Minister Naoto Kan,told reporters, according to Kyodo News agency.

The outlook, however, is hardly sunny as Japan prepares to lose its No. 2 spot in the global economic pecking order after the United States - a position it has held for more than four decades.

Analysts predict that consumer demand will almost certainly decelerate, hindering growth in the months ahead. Exacerbating woes is a viscous cycle of falling prices and wages, along with a shrinking population and tax base.

The GDP fell a record 5 percent in 2009, the Cabinet Office report said in its report.

In contrast, China’s red-hot economy is expanding at a furious pace. Fourth quarter growth jumped to 10.7 percent, bringing overall 2009 growth to 8.7 percent.

Takuji Okubo, chief economist at Societe Generale in Tokyo, expects China to overtake Japan sometime this year.

“The Japanese population has become quite sober about themselves and relatively pessimistic about the country’s outlook,” Mr. Okubo said. “So I don’t think they will be surprised” when Japan falls to No. 3.

But in many ways, Japan needs a strong China.

It is soaring demand from China and other Asian markets that has lifted Japan from its own downturn, helping to offset persistent domestic weaknesses.

Japanese exports in December rose for the first time since the collapse of Lehman Brothers in late 2008, powering industrial production up 2.2 percent from the previous month.

The annualized headline GDP figure corresponds to quarterly growth of 1.1 percent. Corporate capital spending climbed 1 percent in the first expansion since January-March 2008. Public investment fell 1.6 percent, while exports jumped 5 percent.

Other major economies also face uncertainty ahead.

The U.S. economy expanded at an annual rate of 5.7 percent in the fourth quarter, but many analysts predict a slowdown this quarter as double-digit unemployment chills consumer spending.

The 16 countries that use the euro barely grew in the fourth quarter, as a modest recovery stalled amid turmoil in financially troubled members such as Greece and a flat performance from Germany, the biggest euro economy.

Further complicating Japan’s economic assessment are growing questions about the reliability of the numbers themselves.

In an embarrassing series of revisions, the Cabinet Office sharply downgraded third quarter GDP, cutting a preliminary figure of 4.8 annualized percent growth to 1.3 percent several weeks later. The government said Monday that in fact, there was no growth at all in the July-September period.

“No matter how strong today’s headline number is, drastic and repeated downward revisions of past GDP make us hold a pessimistic view of the current economic condition,” said Junko Nishioka, chief economist at RBS Securities Japan, in a report.

The government has said it is reviewing the way it calculates GDP data and has pledged to improve accuracy. It recently recalibrated seasonal adjustments to account for the massive drop in exports in late 2008 and early 2009.

Japan’s central bank will hold a two-day policy board meeting starting on Wednesday.

The latest GDP figures are generally in line with the Bank of Japan’s view that exports are underpinning the country’s recovery. As such, the board is expected to keep its key interest rate at 0.1 percent and refrain from introducing new steps to ease monetary policy.

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