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Japan Economy Surpassed by China as GDP Is Less Than Estimated

Japan’s economy grew at less than a fifth of the pace economists estimated last quarter, pushing it into third place behind the U.S. and China and adding to evidence the global recovery is faltering.

Gross domestic product rose an annualized 0.4 percent in the three months ended June 30, the Cabinet Office said today in Tokyo. The median estimate of 19 economists surveyed by Bloomberg News was for growth of 2.3 percent. The data reinforce International Monetary Fund predictions that China will be the No. 2 economy by the end of 2010.

Today’s milestone reflects Japan’s two decades of economic stagnation during which the government racked up the world’s biggest public debt, the Nikkei 225 Stock Average lost three quarters of its value and the population began to shrink. China’s ascent caps off moves begun by Deng Xiaoping more than 30 years ago to transform the country from an agrarian state into the world’s fastest-growing major economy.

“Japan’s been stuck in recessions and deflation for the past 20 years, and that has kept the nominal GDP growth rate at an exceptionally low level,” said Naoki Iizuka, a senior economist at Mizuho Securities Co. in Tokyo. “China really intensified its global outreach in the 90s and since the 2000s its growth rate has accelerated.”

Jostling for Second

Japan’s economic output totaled $1.288 trillion in the second quarter, less than China’s $1.337 trillion, the Cabinet Office said in a statement today. Japan remained bigger in the first half of 2010, the government agency said.

While China’s output was also larger in the fourth quarter of 2009, Japan’s GDP rebounded to exceed China’s in the first quarter, according to data compiled by Bloomberg News.

Japan’s recovery from its worst postwar recession has been hamstrung by the yen’s climb to a 15-year high against the dollar, threatening profits at exporters including Honda Motor Co. and Sony Corp. The economic slowdown may put pressure on the Bank of Japan to expand monetary stimulus as the nation’s record debt constrains the government’s ability to do so.

Export growth slowed and consumer spending stalled last quarter, today’s figures showed. The expansion was weaker than all economists estimated, with their predictions ranging from 0.6 percent to 3.4 percent. Growth slowed from 4.4 percent in the first quarter.

The Nikkei fell 0.6 percent to 9,200.81 at 1:26 p.m. in Tokyo, heading for its lowest close since November. The gauge peaked at 38,915.87 on Dec. 29, 1989. The yen climbed to 85.84 per dollar at from 85.95 before the GDP report. It reached 84.73 yen on Aug. 11, the strongest level since July 1995.

Slowest Expansion

From the previous quarter, Japan grew 0.1 percent, the slowest expansion among the six biggest economies. The U.S. grew 0.6 percent, the U.K. 1.1 percent, Germany 2.2 percent and France 0.6 percent. While China doesn’t release quarter-on- quarter GDP figures, it expanded 10.3 percent from a year ago.

China’s ascent isn’t necessarily bad for Japan, which increasingly relies on its Asian rival for exports, said Martin Schulz, senior economist in Tokyo at Fujitsu Research Institute. “The stronger China continues to grow, the better it is for Japan,” he said.

Without adjusting for price changes, Japan shrank a nominal 0.9 percent from the previous quarter, the first contraction since July to September 2009. Price declines showed signs of easing, with the GDP deflator falling 1.8 percent, narrowing from a 2.8 percent drop previously.

‘Tough Situation’

“This was a very weak report,” said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo. “With exports slowing and domestic demand still weak, the economy will be in a tough situation.”

Net exports, or shipments minus imports, added 0.3 percentage point to Japan’s growth, the least in three quarters. Consumer spending, which accounts for about 60 percent of the economy, was unchanged, halting four quarters of gains and indicating government incentives to buy cars and electronics may be waning. Business spending advanced 0.5 percent.

“The impact of the stronger yen will materialize more in the third quarter by pushing down export volumes and corporate profits,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “Government pressure on the BOJ for further monetary easing will likely increase in the coming months.”

No Stimulus Planned

National Strategy Minister Satoshi Arai told reporters that the GDP report wasn’t an indication of the economy falling into a lull and the government isn’t planning any stimulus packages now. He said politicians need to work with the central bank to combat the stronger yen.

Prime Minister Naoto Kan said he is concerned about the currency’s advance, Kyodo News reported on Aug. 14. The yen may match its April 1995 peak of 79.75, Eisuke Sakakibara, formerly Japan’s top currency official, said yesterday on Fuji Television.

The strengthening currency prompted Finance Minister Yoshihiko Noda to say last week “excessive” moves can hurt the economy. He pledged to work with Bank of Japan Governor Masaaki Shirakawa, who said in a statement the bank is closely watching “substantial” movements in foreign-exchange and stock markets.

The BOJ, which kept policy unchanged last week, introduced a bank-loan program in December after the yen surged and stocks plunged. The central bank has kept the benchmark interest rate at 0.1 percent since December 2008.

“If the Japanese economy is forced to create a production structure based on 85 yen to the dollar, that would be disastrous,” as the nation wouldn’t earn enough from exports to pay for commodities from overseas, Honda’s Chief Financial Officer Yoichi Hojo said on Aug. 5.

A group of lawmakers from the ruling Democratic Party of Japan last week urged Prime Minister Kan to consider intervening in the currency market for the first time since 2004 to arrest the yen’s rally. They also called for monetary easing from the central bank.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

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