It’s official: China overtakes JapanBut Tokyo’s Q4 contraction should be short-lived, with output set to rise

TOKYO – Japan’s economy contracted for the first time in five quarters as exports slowed and government stimulus faded, a pullback projected to be temporary as demand from China and the United States revives output this year.

Gross domestic product shrank an annualised 1.1 per cent in the three months ended Dec 31, following a revised 3.3-per-cent expansion in the previous quarter, the Cabinet Office said this morning in Tokyo. The median forecast of 26 economists surveyed by Bloomberg News was for a 2-per-cent drop.

This meant that China’s economy overtook Japan’s as the world’s second largest for 2010, today’s data showed, underscoring the rising role of the Japanese neighbour as a source for growth. Japan’s benchmark 10-year government bond yields reached a 10-month high last week amid expectations the expansions in China and the US, the country’s biggest export markets, will spur domestic output.

“Japan bottomed out in the fourth quarter,” said economist Yuichi Kodama. “China’s economy is already showing signs of resurgence and the US is rebounding, building up expectations of an export-led revival in Japan.”

Toyota and Komatsu have raised their profit forecasts for the year ending March as demand from Asia helped boost sales.

Government data released in the past month showed that machinery orders rose for the first time in four months in December, signaling a recovery in companies’ capital spending, while industrial production increased the most in 11 months and export growth accelerated.

“Companies are looking abroad to expand their production bases rather than increasing domestic business investment,” said BNP Paribas economist Hiroshi Shiraishi.

Growth will rebound to 0.6 per cent in the first quarter and accelerate to 1.9 per cent by the final three months of 2011, according to the median estimate of 14 economists surveyed by Bloomberg News.

Private consumption, accounting for about 60 per cent of GDP, dragged down the fourth-quarter GDP after the government ended a subsidy programme to buy fuel-efficient cars in September and reduced incentives to purchase electronic home appliances in December.

“This was a temporary pullback from the stimulus boosts in the third quarter, so we don’t need to be too pessimistic about the economic outlook,” said Credit Agricole chief economist Susumu Kato. “The economy will likely gain traction toward the end of this year.” Theo

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