China Tops Japan As No. 2 Economy

China has dethroned Japan as the world’s No. 2 economy, amid media hype about the former’s competitiveness. Chalk it up to slowing global growth and China’s strong desire to embrace technology.

The United States, the planet’s No. 1 economy, experienced a disappointing 0.4 percent GDP (Gross Domestic Product) during the first half of this year. This is far below the annualized 4.4 percent growth reported in the first quarter and it reinforces evidence that global recovery is slowing.

The results underscore China’s emergence as an emerging economic powerhouse. Worldwide factors are changing everything from the balance of military and financial power to how cars and microchips are designed. China already is the world’s largest exporter, auto purchaser and steel producer. This means that China’s geopolitical influence is expanding and getting more powerful.

World markets responded negatively, given the situation, and Wall Street is no exception. Since China carries much of our debt, this is really not a surprise. The only market responding favorably to the new shift is Germany.

China was a major force behind the world’s emergence from the deep recession of the 1920s. The country’s economic might provided much-needed demand for goods and services from the United States, Japan, and Europe. Tokyo’s latest numbers, however, suggest Chinese demand may not be enough to sustain other world leaders, especially America.

Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo, says, “Japan is the canary in the gold mine because it depends very much on demand in Asia and China, and demand is cooling quite a bit.” He adds, “This is a warning sign for all major economies that just focusing on overseas demand won’t be sufficient.”

Many financial experts note China surpassed Japan in quarterly GDP figures in the past, but this time it’s unlikely to change and to relinquish the lead. To put this into perspective, China’s economy will almost certainly exceed Japan’s at the end of this year because of the huge difference or comparison of each country’s growth rates.

China is growing about 10 percent a year, while Japan’s economy is forecast to grow between 2 percent and 3 percent this year. Last year, the gap between the two economies narrowed considerably.

Japan’s GDP, not adjusted for price and seasonal variations, was valued at $1.286 trillion in the April-to-June quarter compared to $1.335 trillion for China. (These figures are converted to dollars based on the average exchange rate for the quarter.) By comparison, for our GDP for the same period was $3.659 trillion.

Faced with slow growth, Japan’s government is considering fresh stimulus programs to strengthen its economy. Most likely the Japanese will try to boost consumer spending on eco-friendly products, according to the Kyodo News Agency, citing unnamed government sources.

Japan has held the No. 2 ranking after America since 1968, when it overtook the former West Germany. From the aftermath of World War II, Japan rose to become a global manufacturing giant and financial powerhouse. But Japan’s so-called “economic miracle” turned into a massive real estate bubble in the 1980s before imploding in 1991.

Japan experienced a decade of stagnant growth and economic malaise from which the country has yet to emerge. Prime Minister Naoto Kan (right), elected in June, faces a long list of difficult problems, including a rapidly aging and shrinking population, persistently weak consumer demand, deflation, and slowing growth in vital export markets.

On the other hand, China’s growth continues to be spectacular. China has a voracious appetite fueling demand for resources, machinery and products from the rest of the developing world, including rich economies such as Japan and Australia. China is Japan’s top trading partner.

China’s emergence has produced obvious and glaring contradictions within the country. There is a wealth gap between the elite, profiting from over three decades of reform and the 1997 inclusion of Hong Kong (pictured at the top of this post), and the extreme poor. China has dozens of billionaires while the rest of its 1.3 billion people are among the world’s poorest.

By comparison, Japan’s people are still among the richest, with a per-capita income of $37,800 last year. China’s per-capita income is $3,600; America’s per-capita income is $42,240. However, the U.S. gap between the very rich and poor also is widening with our lingering recession.

What Are The Implications?

“We should be concerned about per-capita GDP,” says Kyohei Morita, chief economist at Barclays Capital in Tokyo. China overtaking Japan is “just symbolic … nothing more than that.”

But the symbolism may be exactly the “wake-up call” Japanese leaders need,” says Schulz of the Fujitsu Research Institute. “Japan is always strangely inward looking, and nobody is doing anything about it.”

Interestingly, Japan’s people appear nonchalant to the power shift. A national poll conducted earlier this year by the Asahi, one Japan’s largest newspapers, showed a roughly equal split between those that believed Japan’s fall to No. 3 (behind America and China) posed a major problem and those who did not. More than half of the 2,347 respondents said Japan does not need to be a global superpower.

The country’s annualized growth in the second quarter already was below expectations of 2.3 percent in a Kyodo news agency survey of analysts. On a quarterly basis, Japan’s GDP grew only 0.1 percent from January to March, according to the country’s Cabinet Office.

We at WMB think the implications of China’s growing dominance are significant as it relates to a percentage of debt.

China’s long-term government debt is only 16.9 percent of GDP. On the other hand, the United States' same relative debt is 52.9 percent of GDP. And, amazingly Japan’s is a whopping 189.9 percent, second only to Zimbabwe.

China is moving to an increasingly strong position in the world. If China decides to sell off its Treasury bills, for instance, it would result in an even larger debt for our country.


WMB believes the United States needs to invest in new technology and cultivate our brain trust in achieving new productivity to create wealth. It is becoming clearer we cannot spend our way out of this recession, and Japan also is unlikely to spend its way out of its slowdown.

We see technology advancement and its subsequent manufacturing as the fastest way to create wealth for any country in this volatile world market. The rules of the economic game have changed, so our strategies need to reflect new thinking.

This post is by TechMan, WMB co-author who blogs about trends, issues and ideas affecting industry, business, technology and consumers. If you like this post, please share it with colleagues, friends and family.