Japan retains world's number two economy tag, for now

With emerging economic powerhouse China snapping at its heels, Japan on Thursday said it still remained the second-largest economy in the world, and raised its third quarter gross domestic product growth to 4.5 percent on an annual basis.

According to the government, Japan’s GDP was $3.959 trillion in the period comprising the first three quarters of the year, helping it sail past China by a slim margin of $12.6 billion and retain the second-largest tag.

Japan has long been projected to eventually lose the status as the second largest economy in the world to its regional rival, possibly by the end of this year, but it seems the country can hold on to the psychologically significant statistical upper hand in politically charged times.

The Cabinet Office said the unexpected surge in third quarter growth estimates was driven by improving private consumption and spurt in corporate capital spending.

The good news apart, analysts have pointed out that the economy was likely to contract marginally the final quarter of the year, as a bevy of data has indicated. The global slowdown isn’t getting any better and Japanese domestic consumers will feel the pinch of the expiry of a slew of stimulus measures, weakening growth.

The small upward revision to Japan's third quarter GDP growth from 0.9 percent to 1.1 percent quarter-over-quarter (or from 3.9 percent to 4.5 percent at an annualized pace) is welcome without changing the big picture, said Julian Jessop, an economist at Capital Economics.

GDP is still likely to contract again in the current quarter following the expiry of government subsidies for car purchases, albeit from a slightly higher starting point.

Jessop also pointed out that third quarter data doesn’t exactly reflect the current situation and a better pointer to growth would be the upcoming fourth quarter Tankan estimates.

Analysts have said the weakening demand in the US, Europe and China will continue to hurt Japan’s exports, as was indicated by trade data released this week.

Japan’s current account surplus, a measure of trade with the rest of the world, expanded 2.9 percent 1.44 trillion yen ($17.20 billion) in October year-on-year, the ministry of finance said on Wednesday.

Japan's economic and fiscal policy minister Banri Kaieda also conceded on Wednesday he expected growth to be significantly lower in the fourth quarter.

Kaieda said while the economy is expected to grow 2.6 percent this year, growth next year could slump to 1.6 percent.