China's economy as No. 2: How it's playing in Japan

China finally overtook Japan and became the world’s second-biggest economy, according to data released this week in Tokyo, which showed minimal GDP growth in the land of the rising sun, while its huge neighbor continued its blistering rise.

While some observers say the change in the economic world order is “purely symbolic,” others say it should act as a wake-up call to both countries – Japan to get its economic house in order, China to become more politically responsible.

And although some Japanese may gaze across the East China Sea with a touch of envy at the growing economic might of the new kid on the block, most knew that this day was inevitable for a country with more than 10 times the population of their homeland’s 127 million.

“China’s domestic expansion is very positive for Japan’s economy,” says Takashi Shiono, an economist at Credit Suisse in Tokyo. “While some Japanese people might feel kind of envious, this is a huge opportunity for Japanese companies.”

It is a view echoed by Dr. Martin Schulz, senior economist at Tokyo’s Fujitsu Research Institute: “The faster China grows, the better it is for Japan.”

For the April-to-June quarter Japan’s GDP, unadjusted for price or seasonal factors, amounted to $1.286 trillion, compared to China’s $1.335 trillion. Japan has been second to the US in GDP terms since it overtook Germany in 1968. Last year, China became the world’s biggest exporter, overtaking Germany, and is already the largest manufacturer and buyer of cars on the planet.

Japan loses steam

Japan’s economy only grew 0.1 percent compared to the previous quarter, sparking fears that the recovery is losing steam both at home and in the global markets on which it remains dependent for its export earnings. The annualized growth rate was 0.4 percent, well below the average expectations of 2.3 percent, and not even in sight of the 10 percent-plus rates that China is enjoying.

With the total GDP figures converted into US dollars at the average exchange rates over the quarter, Japan may yet temporarily regain the position of Asia’s top dog, but there’s no doubt as to the trajectories of the two economies. Since the bursting of the bubble at the beginning of the 1990s, Japan’s economy has barely grown, and its stock market is at less than a quarter of the dizzy heights it touched in the boom times.

China’s economy, on the other hand, is nearly 100 times the size it was when market reforms began three decades ago.

Japan, of course, still boasts a GDP per capita of $39,700 to China’s $3,600. For all the new billionaires in China, there are hundreds of millions still living on less than a dollar a day, leaving it nestled between Albania and El Salvador in the rank of average economic output per person.

But Japanese businesses are targeting the vast new market on their doorstep. When the growing numbers of newly wealthy Chinese tourists visit Japan, for example, it is Nikons and Canons that are mostly to be found around their necks, rather than cheaper domestic cameras.

Mr. Shiono, at Credit Suisse, is far more concerned with the weakness in Japan’s domestic economy than the strength of China’s. “When deflation is factored in, Japan’s economy has actually shrunk over the past five years: This is a potential disaster for the country’s finances if it continues,” he says.

Dr. Schulz hopes that being surpassed by China acts as “a wake-up call to Japan” to address the structural weaknesses in its economy that have seen it rack up debt equal to almost 200 percent of its GDP. He also believes Japan needs to become active both economically and politically in Asia to act as a counterbalance to an increasingly powerful China.

“Almost everyone in Asia is now more scared of China than of Japan,” argues Schulz.

China’s new status as a regional power should encourage it to be more politically responsible and “allow its currency to strengthen,” according to Schulz.

Back in the days of Japan’s 1980s bubble, some were predicting that it was only a matter of time before it overtook the US to become No. 1 economically. While the subsequent crash effectively finished that off, China now looks a far more likely candidate for the top spot than Japan ever did.