China’s economy passes Japan’s as world’s second-largest

China’s economy has surpassed Japan’s as the world’s second largest, a highly anticipated milestone rich in symbolism for a developing country that began market reforms only three decades ago.

The news came Monday when Japan’s government said its economic output in the second quarter slowed to $1.28 trillion, short of the $1.33 trillion China reported over the same period.

Although China’s economy bested Japan’s in the fourth quarter of last year, economists say China is poised to be ahead for the foreseeable future as Japan’s economy struggles to recover from the financial crisis.

Japan has been stunted by weak consumer spending and lower corporate investment. Although China’s economy has slowed in recent months from its most torrid expansion, many economists expect it to maintain high growth rates as the country continues to urbanize.

“China’s population is 10 times the size of Japan’s, and China’s growth was more than 10% last year,” said Masamichi Adachi, JPMorgan’s senior economist in Tokyo. “Japan’s economy has been sluggish. So it was inevitable that China would overtake Japan.”

Still, the achievement was hard to fathom when the Chinese government introduced economic reforms in 1978, gradually shedding state control and laying the foundation for a manufacturing and export powerhouse.

Today, China’s demand for energy and raw materials helps dictate global supply and demand. Coupled with its mass holdings of foreign reserves and debt, Beijing’s international clout — whether it admits it or not — has risen to new heights. The Asian giant has also irked trading partners by keeping its currency cheap to boost its trade sector.

China’s economic ascendance has been fueled largely by the sheer size of the nation. Its population of 1.3 billion has helped build it into the world’s No. 1 automobile market and the largest exporter.

Yet the paradox remains that many Chinese are still poor compared with people in the economies it has so quickly overtaken.

Japan’s per capita gross domestic product is still more than 10 times as large as China’s. In the United States, whose economy China is predicted to surpass in a decade or so to reach No. 1, it’s 12.5 times as large.

In the coming years, China faces the challenge of having to reform its economy toward greater domestic consumption over foreign demand. The nation also confronts the ever-present threat of environmental catastrophe that could derail its development.

Some economists worry China’s new ranking will shift attention away from the delicate work ahead.

“It is high time for China to keep its head cool and shift its focus from the pursuit of mere GDP figures to the quality of its growth pattern,” said Liu Baocheng, a professor at the University of International Business and Economics in Beijing.

In the near term, policymakers are searching for new growth drivers after allowing a record amount of bank lending in 2009. The result of that has been massive infrastructure investment and a sizzling real estate market that the government has intervened to cool because of fears of rising debt and social discontent.

“I think China is doing a lot to catch up to advanced countries, but you have to recognize that the Chinese government doesn’t want radical change in terms of its currency and trade,” Adachi said. “They still [want] to be treated like a developing economy. One day they will have to change.”

david.pierson@latimes.com

Hall is a special correspondent in Tokyo.