No Time to Worry About 2nd
Image Credit: Chris Gladis

No Time to Worry About 2nd

 
 

Who's No. 2? Japan or China? While this week’s GDP figures indicate that China was the world’s second biggest economy in the second quarter, Japan’s anemic GDP growth should be of more concern to policymakers in Tokyo.

That China’s economy will permanently overtake Japan’s as the world’s largest after the United States is inevitable if it hasn't happened already. It’s a milestone of more significance for Chinese national pride and Communist Party of China legitimacy than for Japan’s government.

China has ten times the population of Japan and its economy has been growing at a sizzling ten percent a year, so no rocket science is required to figure out which of these two economies of equivalent scale at the moment will be the bigger over the coming years. Now if China’s per capita GDP were to overtake Japan’s, that would be news, but there’s obviously no sign of that happening anytime soon.
 

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If anything, China’s emergence as an economic heavyweight is good news for Japan. China is now Tokyo’s biggest export market providing a welcome alternative to the U.S. and Europe, especially considering the yen’s strength against the dollar and the euro, which pares the value of Japanese export earnings in those markets.

Exports to China have helped Japan to move toward recovery, but the latest GDP figures show the limitations of relying on the nation’s exporters to save the day. The figures showed annualized real growth slumping from 4.4 percent in the previous quarter to only 0.4 percent in the last quarter. Nominal GDP, meanwhile, shrank at an annualized 3.7 percent showing the strength of deflation in the economy.

As the impact of stimulus measures wear off, the yen gets stronger and deflation worsens, is this the prelude to a much talked about double-dip recession? Shouldn’t action been taken to avoid that?

In this respect, the administration of Prime Minister Naoto Kan is giving a fairly good impression of a rudderless ship lost at sea at the moment. Taking a generous view, this could be an avoid-trouble limbo period before the Democratic Party of Japan has its leadership election next month. But surely the government needs to consider taking some action beyond verbal interventions to weaken the yen? Kan’s mantra of fiscal consolidation suggests another significant stimulus package (as called for by the DPJ’s coalition partner) is not on the cards. But will his administration, together with the Bank of Japan, look to do something at least to stem the rise of the yen?

Without any action taken, the only hope can be that China does indeed continue to outpace Japan, establishing itself more comprehensively as the world’s second biggest economy, and, most importantly, buying an ever increasing amount of exports from a grateful Japan.

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