JAPAN HAS YIELDED its place as the second-largest economy in the world to China.

The Japanese Cabinet Office has today produced a preliminary report which states that GDP for the country fell 1.1 per cent in the last quarter of 2010. A drop in exports, in consumer spending and “diminishing government stimulus programmes” were all factors in the decline.

According to the data, China has now overtaken Japan as the world’s second-largest economy, reports Chinese news agency Xinhua.

China’s nominal GDP (Gross Domestic Product) is now $5.9 trillion – $Japan’s is 5.47 trillion.

However, Japan is putting on a brave face of losing the second place that it has held for over four decades. The Chief Cabinet Secretary Yukio Edano said that the Japanese government is focused on being an economic success in order to give its citizens a good quality of life, rather than out of rivalry with its neighbour. He said:

We are not engaging in economic activities to vie for ranking but to enhance people’s lives. From that point of view we welcome China’s economic advancement as a neighbouring country. The important thing is to incorporate such vitality of China to seek growth in the Japanese economy.

The New York Daily News is already looking further ahead to the position of the US as the world’s largest economy. The paper is claiming that the Japanese government has warned that China will also overtake the States sometime between 2020 and 2030, should its current rate of growth continue.

However, some are already striking a warning bell for the Chinese economy. Michael Schuman in Time magazine points out that “China today is using similar policies and practices” that Japan used to become the original Asian tiger economy. Schuman concludes that the same system of “state capitalism” – a mix of government-controlled industry and free enterprise – which China is using brought Japan to the top of the global charts and back down again.

Read Michael Schuman’s insights into the future of the Chinese economy in his Time blog here>