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Asia Economy Last Updated: Aug 23, 2010 - 8:24:15 PM


Historic milestone as China overtakes Japan in the second quarter to become world's second biggest economy
By Finfacts Team
Aug 16, 2010 - 4:02:31 AM

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The national flag of China flies at half mast at the Badaling Great Wall in Beijing, Aug. 15, 2010, to mourn for the victims of the Aug. 8th mudslide disaster in Zhouqu County, Gannan Tibetan Autonomous Prefecture in northwest China's Gansu Province. China on Sunday held a day of mourning for the mudslide victims. Photo: Xinhua

In a historic milestone, China has overtaken Japan in the second quarter to become the world's second biggest economy.

Japan’s economic output for the second quarter totaled $1.288trn compared with China’s $1.337trn, Keisuke Tsumura, a parliamentary secretary at the Cabinet Office, said at a press conference on Monday in Tokyo. Tsumura, who was using the government department’s own calculations, said Japan remained bigger in the first half of 2010.

To compound the misery for Japan, Dong-A Ilbo, a South Korean daily, reported Monday that South Korea will surpass Japan in economic output per capita in 2031, a major international economics organization said Friday. IHS Global Insight said that GDP per capita in Korea will reach $72,432 in 2031, exceeding Japan's $71,788.

The agency said Japan's per capita GDP this year of $41,631 will be more than double Korea's $20,715, but added that Korea will narrow this gap in future years and overtake Japan in 2031. Korea is expected then to widen its lead over Japan, with the country's GDP per capita reaching $86,129 in 2035, compared to Japan's $79,694. By 2040, the economic output per person will be $109,617 to Japan's $88,575.

Japan's Asahi Shimbun, said the Groningen Growth and Development Centre of Groningen University in the Netherlands, which calculates historical economic indicators, says Japan's per capita GDP in 1700 was $570 based on purchasing power parity. China's was a reported $600 the same year, a level similar to Korea's. Japan saw exponential economic growth in the 18th century by expanding trade with European nations, including Portugal and Spain. At the time, European records contained warnings like, "Don't show anything to the Japanese. They copy things amazingly fast."

According to the centre, Japan's per capita GDP was $669 in 1820 and began to overtake those of China and Korea ($600). If Korea overtakes Japan in per capita GDP in 2031, it will have done so for the first time in 211 years.

Most of the Japanese originate from the Korean Peninsula.

Japan is struggling with its yen at a 15-year high against the US dollar and its real GDP (gross domestic product) was reported today to have  increased 0.4% in annualised terms in the April-June period, the slowest pace in three quarters and down from a revised 4.4% rise in the January-March quarter.

Net exports, or shipments minus imports, added 0.3 percentage point to growth in the second quarter, down from a revised 0.6% in the first three months of 2010.

Japanese consumer spending, which account for about 60% of the economy, was unchanged, compared with the previous quarter’s revised 0.5% gain and business spending rose 0.5% compared with 0.6% in the first three months.

Susumu Kato, managing director & chief economist at Credit Agricole Corporate & Investment Bank, speaks to CNBC's Karen Tso and Bernard Lo about the different factors weighing on Japan's economy in the second quarter:

In the world ranking stakes, China's GDP topped Japan's in the last quarter of the year, a traditionally strong quarter for China. Analysts see the second quarter result as a good signal that China will cement its supremacy for the full year.

China's $5trn economy compares with the US's output of almost $15trn and at current growth rates, China could match the US in a decade.

The Wall Street Journal says that a little over a decade ago, China was the world's seventh-largest economy at prevailing exchange rates. It passed Germany to wind up at No. 3 in 2007. For 2010, Germany is expected to rank fourth, France fifth and the United Kingdom sixth. The next emerging economy is Brazil, in eighth place after Italy.

The Journal says China's exact global ranking is a function of how economies are measured. For example, in terms of purchasing-power parity, which takes into account the goods and services a country's currency actually buys at home, China has long since surpassed Japan for second place behind the US. By contrast, China's output per person, at about $4,000, is about a tenth that of Japan's.

SEE: Finfacts article, Apr 2010; Globalization and Asia’s return to economic supremacy

Kenneth Huang, assistant professor of management at Singapore Management University, says there has been significant growth in China's high-tech, IT patents. He speaks to CNBC's Bernard Lo and Karen Tso about growing innovation in the mainland:

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