Has China Overtook Japan???

Today (17.08.2010) when I was browsing the Economist website found 2 contradict statements. One states that "China's economy overtakes Japan's in real terms" and other States that "Japan overtakes China as the world's third largest economy". The beauty is both the Articles are published on 16th  August 2010. 

Later I went on to do some research regarding this and found that Japan’s nominal Gross Domestic Product for the second quarter was $1.288 trillion which is less than China’s  $1.337 trillion. During the first quarter(first half of 2010) Japan remained bigger than China. Japan’s annual GDP is $5.07 trillion, while China’s is more than $4.9 trillion as per official data. 

It is believed that by some estimates China’s quarterly output actually overtook Japan’s in nominal (US dollar) terms in the fourth quarter of last year. Since the last quarter China has continued to grow rapidly while Japan’s recovery has stalled (due to weak policy framework and outlook?).

In terms of purchasing power parity, China replaced Japan as the world’s second largest economy nearly 10 years back. As per the world bank data 2009, China GDP - PPP is $ 8,887,863 million and Japan's $ 4,138,481. China’s economy also moderated from 11.9 per cent year-on-year growth in the first quarter to 10.3 per cent in the second.

As per Monday’s (16.08.2010) data the deflation remains entrenched in the Japan economy, which prevents people from spending as they expect prices could fall further. The Nominal growth dropped by 3.7 per cent annualised in the second quarter after two quarters of positive growth. In Japan, weak growth in the second quarter has raised questions about the strength of its economic recovery. 

Japan’s slow growth is due to the stalling on consumer spending, falling public investment and slower exports. Net export growth slowed but remained solid and was the main contributor to growth.

But still Japan is relatively richer than China in terms of Per Capita Income. According to world bank ranking Japan is ranked at 39 ($ 33, 280) and China (main China land - excludes Hong Kong SAR, China & Macao SAR, China) is ranked at 120 ($ 6,710)

This arises few questions 

1. How much one can rely on China's Data?  It is believed that the current Data are not strictly comparable because the Japan's data have been seasonally adjusted while China's data have not. 

2.  If China has really overtook Japan's economy in real terms, then how much their overall GDP growth (real GDP) will be this year?

3. How Japan is going to handle crisis (or) crunch in their economy after having positive growth rates in 2 consecutive quarters? 

Can Emerging Countries handle Inflationary Pressure?

Recently I have read an Article titled “Inflation: The Great New Divide - Capital from the low-growth West fuels price increases in Asia” by Peter Coy. In this article he clearly expresses his views on how Emerging countries are facing Inflationary pressure along with pressure of the role of locomotive to the Global Economy. He also clearly states that how India and China is playing a major role of locomotive to pull the Global Economy out of recession.


In this article he states that “For most of the post-World War II era, the U.S. was the locomotive that pulled the global economy out of recessionary valleys. This time it has been emerging-market nations, mostly Brazil, China, and India that have surged, carrying the U.S. along like a big, fat caboose. Exports accounted for a little more than half of the growth the U.S. economy managed to generate in late 2009 and early 2010, according to data compiled by the Commerce Dept. About 40 percent of U.S. exports went to emerging markets”


He fears that the “…. inflation in emerging markets—and near-deflation in developed economies—could slow the growth train”. In context of India and China he states that “Chinese and Indian policymakers are trying to cool things by curbing government spending, raising interest rates, or both. If they accidentally crack down too much, they won't be able to play the role of locomotive. That would be a blow to a U.S. economy that is already threatened with a pause or, at the extreme, a double-dip recession.”


Regarding Japan and Europe economy he expresses that “…. at risk are Japan and Western Europe, which, like the U.S., are wealthy but slow-growing and facing deflationary pressures”. According to Economist Dr. Edward Yardeni (in an interview with Bloomberg Businessweek) "The inflation problem is in exactly the countries you don't want an inflation problem"


Peter coy further states that “The accompanying graphic tells the story of a divided world. On the right are large, light-colored bubbles representing India, China, Turkey, and Brazil. These are countries with relatively low incomes, rapid economic growth, high inflation rates, and increases in inflation over the past year. The other prominent cluster is the wealthy nations in North America and Western Europe, plus Japan and Australia. They have higher incomes, slower growth, lower inflation rates, and smaller increases in inflation. Japan (diamond-shaped) is the only country suffering outright deflation. Russia's big drop in inflation makes it an outlier, befitting its halfway position between the rich and poor nations”. At the end of this article he gives a punch with a statement “The Bottom Line: The world economy is evolving into inflationary and near-deflationary zones. Emerging markets must slow down without crashing”. (For Full Article: http://www.businessweek.com/print/magazine/content/10_32/b4190010426918.htm)


It is true to that Emerging Economies are facing Inflationary Pressure and Developed nations are facing Deflationary problems. Dr. Edward Yardeni Rightly said in his interview to Bloomberg Businessweek that "The inflation problem is in exactly the countries you don't want an inflation problem".


Now, the Major worry is that if these Emerging Economies fail to handle the Inflationary Pressure (in an appropriate manner) then the entire global economy may fall into another Depression (yes, not mere Recession). One can be sure to certain extent that it may not happen in such manner because these Emerging Economies are well known for their policymaking ability. But, we need to watch how they tackle the current problem of Inflation without affecting their growth rates and their role of locomotive for other countries across the globe.