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By TOMOKO A. HOSAKA, Associated Press Writer
TOKYO Japan lost its place as the world's No. 2 economy to China in the
second quarter as receding global growth sapped momentum and stunted a shaky
recovery.
Gross domestic product grew at an annualized rate of just 0.4 percent, the
government said Monday, far below the annualized 4.4 percent expansion in the
first quarter and adding to evidence the global recovery is facing strong
headwinds.
The figures underscore China's emergence as an economic power that is changing
everything from the global balance of military and financial power to how cars
are designed. It is already the biggest exporter, auto buyer and steel
producer, and its global influence is expanding.
China has been a major force behind the world's emergence from deep recession,
delivering much-needed juice to the U.S., Japan and Europe. Tokyo's latest
numbers, however, suggest that Chinese demand alone may not be enough for Japan
or other economic giants.
"Japan is the canary in the goldmine because it depends very much on demand in
Asia and China, and this demand is cooling quite a bit," said Martin Schulz,
senior economist at Fujitsu Research Institute in Tokyo. "This is a warning
sign for all major economies that just focusing on overseas demand won't be
sufficient."
China has surpassed Japan in quarterly GDP figures before, but this time it's
unlikely to relinquish the lead.
China's economy will almost certainly be bigger than Japan's at the end of 2010
because of the huge difference in each country's growth rates. China is growing
at about 10 percent a year, while Japan's economy is forecast to grow between 2
to 3 percent this year. The gap between the size of the two economies at the
end of last year was already narrow.
Japan's nominal GDP, which isn't adjusted for price and seasonal variations,
was worth $1.286 trillion in the April-to-June quarter compared with $1.335
trillion for China. The figures are converted into dollars based on an average
exchange rate for the quarter.
Japan has held the No. 2 spot after the U.S. since 1968, when it overtook West
Germany. From the ashes of World War II, the country rose to become a global
manufacturing and financial powerhouse. But its so-called "economic miracle"
turned into a massive real estate bubble in the 1980s before imploding in 1991.
What followed was a decade of stagnant growth and economic malaise from which
the country never really recovered. Prime Minister Naoto Kan now faces a long
list of daunting problems: a rapidly aging and shrinking population,
persistently weak domestic demand, deflation, a strong yen and slowing growth
in key export markets.
In contrast, China's growth has been spectacular, its voracious appetite
fueling demand for resources, machinery and products from the developing world
as well as rich economies like Japan and Australia. China is Japan's top
trading partner.
China's rise has produced glaring contradictions. The wealth gap between an
elite who profited most from three decades of reform and its poor majority is
so extreme that China has dozens of billionaires while average income for the
rest of its 1.3 billion people is among the world's lowest.
Japan's people still are among the world's richest, with a per capita income of
$37,800 last year, compared with China's $3,600. So are Americans at $42,240,
their economy still by far the biggest.
"We should be concerned about per capita GDP," said Kyohei Morita, chief
economist at Barclays Capital in Tokyo. China overtaking Japan "is just
symbolic," he said. "It's nothing more than that."
But the symbolism may be exactly the "wake-up call" Japanese leaders need, said
Schulz of the Fujitsu Research Institute. "Japan is always strangely inward
looking," he said. "And nobody is doing anything about it."
Japan's people appear resigned to the power shift. A national poll conducted
earlier this year by the Asahi, one of Japan's biggest newspapers, showed a
roughly equal split between those that believed Japan's fall to No. 3 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 was also sharply below
expectations of 2.3 percent in a Kyodo news agency survey of analysts. On a
quarterly basis, Japan's GDP or the total value of the nation's goods and
services grew 0.1 percent from the January-March period, the Cabinet Office
said.
Consumer spending, which accounts for about 60 percent of GDP, was flat from
the previous quarter, the figures showed. Capital spending by companies rose
0.5 percent, while public investment fell 3.4 percent.
The outlook for the third quarter is uncertain. Private consumption appears to
be solid so far, helped in part by unusually hot weather, said Masamichi
Adachi, senior economist at JP Morgan Securities Japan. But the slowing global
economy is weakening exports and production.
A stronger yen, which hit a 15-year high against the dollar last week, also
poses a major risk for the country's export-driven economy. Yen appreciation
reduces the value of repatriated profits for companies like Toyota Motor Corp.
and Sony Corp. and makes their products more expensive abroad.
The currency worries led Finance Minister Yoshihiko Noda to say last week that
he is closely monitoring foreign exchange rates. Bank of Japan Gov. Masaaki
Shirakawa released a similar statement to try to calm markets.