China 2nd Largest Economy, Japan lags

By Ai Lung Nguyen - August 2010.

POLITICS - Japan has been overtaken by China as the world's 2nd largest economy. Japan's growth rate has been slower and shaky recently whereas China has been continuing to leap forward due to the undervaluation of the Yuan and high demand for Chinese exports. Japan has been holding the #2 spot almost constantly since 1968, rising from the ashes of WWII to become a manufacturing powerhouse.

Japan's GDP grew at an annual rate of 0.4% in the last year, below the expectations of 2.3% growth. Japanese economists hope Japan will be stronger in the 3rd and 4th quarters, possibly showing 3% growth.

Meanwhile China's growth in the last year has been 10% and has been consistently growing approx. 10% each year for the last decade. China is already the biggest steel producer, the biggest exporter, the biggest auto buyer and is altering the global financial balance. China has passed Japan before, but this time economists believe it will permanent as China is now gaining rapidly on the United States.

The biggest trick in all this however is how the currency is valued. In Japan the Yen has been very rocky during the last year, losing about 8% of its value in the March to May period of 2010, but is overall up compared to last year. That rockiness has hurt Japanese productivity and exports.

China in contrasts pegs the Yuan to the US dollar and is so ridiculously undervalued it really should be worth 3 to 5 times more than it currently is. Taking that into account China is technically the world's largest economy, but because China's currency is deliberately undervalued it skews the whole perspective...

Which begs the question, why do we even bother measuring these things in US dollars when we know currency fluctuations and valuations skews everything.

Japan's economic woes are only getting worse. Their real estate industry was booming during the 1980s until the bubble burst in 1991. They never recovered from the economic malaise of the 1990s and now face real problems due to an aging population, a shrinking birth rate, weak domestic demand, deflation and the strong yen is hurting exports. The only things Japan has going for it is its robotics, computers, cameras and anime industries... all of which Japan is losing ground on as other countries gain market share.

China is hardly playing fair in all this, pegging the Yuan to the US dollar has created a global imbalance. Sure, the average person in China only earns $3,600 USD per year, but that's because they're only paid approx. $10 per day when they should be earning $50 or more. Food prices, rent, etc is all super cheap in China and its difficult to estimate what China's real economic power is.

Multiply it by three perhaps and we might get a conservative estimate.