Japan's economy shrinks in Q4 as China moves ahead

TOKYO: Japan ceded its spot as the world's second-biggest economy to China in 2010, as gross domestic product contracted in the fourth quarter on sliding consumer consumption and demand, data showed.

Real gross domestic product slipped by an annualised 1.1 percent in the October-December quarter as the expiration of auto subsidies hit car sales, a new tobacco tax sapped cigarette demand and a strong yen hurt exports.

While the quarterly figure beat analyst expectations of a 2.4 percent contraction according to a Dow Jones Newswires poll of economists, Japanese GDP data is subject to constant revision.

Japan's economy grew 3.9 percent in 2010, government data showed, but fell behind rapidly growing China to become the world's third-biggest.

Its post-war "economic miracle" put it at number two behind the United States for more than 40 years, but stagnation after its property bubble burst in the 1990s helped put China on course to supplant it this year.

Japan's nominal GDP of $5.474 trillion in 2010 put it behind China's $5.879 trillion, the data showed.

While China's leap forward reflects a shift in economic power as the country transforms from poverty-hit communist state to global heavyweight, it highlights the need for Japan to re-energise its economy, say analysts.

Despite Japan crawling out of a severe year-long recession in 2009, its recovery remains fragile with deflation, high public debt, weak domestic demand, softening exports and a strong yen all concerns for policymakers.

Last month Standard & Poor's cut Japan's credit rating one notch to "AA-" from "AA", saying the government lacked a "coherent strategy" to ease a debt running near 200 percent of GDP, the highest of any developed nation.

Nearly a third of government spending is being swallowed up by a social security system catering to a rapidly greying society, Standard & Poor's warned, with that ratio set to rise without reforms as Japan continues to age.

Prime Minister Naoto Kan's centre-left government has prioritised social security reform and an overhaul of the tax system, but has seen his approval ratings fall and the opposition has so far refused to begin talks on the issue.