China challenge

The data pointed to the looming prospect of China overtaking Japan as the world's second-largest economy.

In depth


Q&A: China overtaking Japan in GDP

Japan slipped behind its Asian rival in the second quarter on nominal terms while remaining just ahead of China in the first half.

On a nominal basis, Japan's second quarter GDP was smaller than China's, at $1.288 trillion compared with $1.336 trillion.

However, Japan's GDP was at $2.578 trillion compared to China's $2.532 trillion in the first half, Japan's cabinet office said in a preliminary estimate.

Both China's commerce ministry and the National Bureau of Statistics declined to comment.

The figures pose a challenge for the government of Naoto Kan, Japan's prime minister.

It has to balance an uncertain economic reality with an agenda dominated by the need to cut Japan's public debt, the industrialised world's biggest at nearly double the GDP.

Weak domestic demand

In June, Japan's unemployment rate edged higher to 5.3 per cent, while production of cars and electronic gadgets underwent a surprise slip, amid signs that an export-driven recovery may be stalling.

Deflation and weak domestic demand have long burdened Japan, as consumers tend to put off purchases in the hope of further price falls.

The planned expiry of government incentives to purchase cars in September may also weigh on production for the domestic market just as the overseas climate worsens.

US economic growth slowed dramatically in the second quarter, down sharply to 2.4 per cent from 3.7 per cent in the first quarter.

Such slowing global expansion is cooling an export sector that is also anxious about the strength of the yen, which recently touched a 15-year high against the dollar.

For every one-yen rise in the currency's value against the dollar, companies can lose tens of billions of yen earned overseas when repatriated, threatening a core part of Japan's economy.

The Nikkei 225 index was 1.48 per cent lower following the release of the data.