It’s Official, China’s Number 2

According to the figures, China’s entire economy produced roughly 5.88 trillion USD worth of goods and services last year, about 400 billion more than that of Japan’s. That’s hella huge! To put it in terms you Apple fanboys can understand, that amounts to approximately 6,315,789,473 iPads!

Other than China’s stellar growth, they reason why Japan “officially” dropped down to the third spot was due to its rather dismal performance during the final quarter of 2010. Its GDP report showed that the country’s economy shrank 1.1% between October and December, in contrast to the 3.3% growth seen the quarter before. It also marked the first decline since the third quarter of 2009. While convincingly negative, the actual figure was actually better than the 2.0% decline initially predicted. Still, I don’t think this is something you should be celebrating…

So why did Japan’s economy contract? The answer is simple: falling exports.

It’s sort of hard to keep the economic engine chugging along when your main growth driver is slowing you down instead of pushing you forward! That being said, you know your export-oriented economy is in trouble when your exports fall 0.7% quarter on quarter.

Once again, we’re seeing a familiar culprit behind Japan’s exports’ weakness–the yen’s appreciation. Of course, this appreciation works against the export industry as it makes Japanese goods more expensive in global markets.

Since October 2010, the yen has been trading near its all-time highs against the dollar. Remember, the last time USD/JPY saw sub-84.00 levels was back in 1995 when Pip Diddy still had wisps of hair on his dome!

Sadly, Japan’s demand troubles are present domestically as well. Private consumption has been in a slump and is actually responsible for a 0.2% slide in GDP. Taxes on tobacco have been hurting cigarette sales, and the expiration of government subsidies in September dragged down car sales in Q4 2010.

Now, take note that market whizkids are expecting things to turn around in 2011. Expectations are that the Japanese economy will grow by 0.6% this quarter, and that growth will eventually creep its way back up to a not-so-bad 1.9% figure by the end of the year.

Still, I can’t help but think about some factors that could weigh down Japanese GDP.

First, we’ve got deflation, which has been a problem for a long, long time already. Late last December, we got news that year-on-year inflation at that point was still at a dismal -0.4%. Remember, rising (or falling) prices are indicative of domestic demand. If prices continue to fall, it’s a sign that the economy is struggling as consumers are choosing not to spend.

Secondly, Kan is struggling to make his mark in the Japanese government, as he is having a hard time convincing legislators from opposing parties to pass his planned budget of about $1 trillion. It’s too bad he can’t just go all samurai and threaten to chop them up to pieces.

According to Kan and finance minister Yoshihiko Noda, if the planned budget does not get approved, it could dampen economic growth. Remember, part of the budget is an allocation towards stimulating the economy.

The problem, of course, is the effect this has on public debt. With Japan currently having one of the worst debt-to-GDP ratios, it’s difficult to introduce more stimulus without adding to its debt. Moreover, financing could prove to more costly, especially with ratings agencies looking to downgrade Japanese bond ratings, which is exactly what S&P did a couple of weeks back.

For now, Japan may have to rely on demand from the two countries listed above it in the GDP rankings, the U.S. and China, to help boost their economy. Besides, third place ain’t too bad right?


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