• Kyodo News

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The economy contracted in the three months through December, allowing Japan to officially crown China the world’s second-biggest economy, a status it had held for more than 40 years, the government said Monday.

Gross domestic product shrank a seasonally adjusted, annualized 1.1 percent in real, or price-adjusted, terms in the final quarter of 2010 to mark its first decline in five quarters, the Cabinet Office said in a preliminary report.

Private consumption dropped 0.7 percent as the effects of the government’s fiscal stimulus measures waned.

The value of Japan’s nominal GDP before adjustment for price changes in 2010 stood at $5.474 trillion — compared with China’s $5.879 trillion — meaning Japan lost the world’s No. 2 position after the United States for the first time since 1968, it said.

GDP is the total value of goods and services produced domestically.

The October-December contraction was slower than expected, however, as analysts surveyed by Kyodo News predicted real GDP would fall by an average of 2.2 percent. The result raises hopes that the economy will return to a recovery track soon, aided by recoveries in exports and corporate capital spending.

“With the negative growth, the pausing of the Japanese economy was confirmed,” Takahide Kiuchi, chief economist at Nomura Securities Co., said in his report. But he added, “It is important that the result came in relatively stronger than forecasts.”

The real GDP fall corresponds to a 0.3 percent decline from the previous quarter, which compared with the average projection of a 0.6 percent drop.

On a nominal basis, the economy shrank 0.6 percent and an annualized 2.5 percent. The GDP deflator, a wider gauge of inflation than the consumer price index, lost 0.4 percent, confirming Japan has been mired in deflation.

For all of 2010, the economy grew a real 3.9 percent for the first rise in three years, after plunging 6.3 percent in 2009 due largely to the global economic slowdown after the financial turmoil. In nominal terms, the economy expanded 1.8 percent, also the first gain in three years.

China released its 2010 data last month, registering price-adjusted 10.3 percent growth.

This reflected the increasingly important roles played by such fast-growing, emerging economies as China and India in the global economy (although their respective per capita GDPs are much smaller than those of the advanced economies), and the disparities in economic growth being enjoyed by those major developing countries have widely been considered an issue the international community must address.

In the reporting quarter, consumer spending, which makes up about 60 percent of Japan’s GDP, dropped especially because of weaker auto sales in reaction to last-minute buying before the expiration in September of a government subsidy program for the purchase of environmentally friendly vehicles. The stimulus measure had helped boost the economy in the previous quarter.

The tobacco price hike in October, which prompted smokers to stock up before its introduction, also caused a negative backlash on the consumption component of the latest GDP.

Corporate capital spending rose 0.9 percent, while public investment fell 5.8 percent.

“Growth turned negative on extraordinary factors,” economic and fiscal policy minister Kaoru Yosano told reporters after the figures were released.

“The situation surrounding Japan’s economy is not necessarily bad,” he said. “The Bank of Japan and the government have the same view that the economy seemingly is at a standstill, but will turn upward.”

Exports fell 0.7 percent, with imports down 0.1 percent. Trade pushed the GDP down by 0.1 percentage point, while domestic demand subtracted 0.2 point from the growth rate.

A stronger yen as well as slowing production in some Asian neighbors significantly weighed on the country’s exports, even as some economists said they had expected a weaker reading for exports, while stressing that they expected a recovery in the January-March quarter on a pickup in the U.S. economy.

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