China is expected to overtake Japan as the world's second largest economy as GDP growth in Japan slowed to 0.1% in the second quarter.
After two quarters of strong growth, GDP growth ground almost to a halt in Q2, according to preliminary figures released today.
The slowdown was driven by domestic demand falling 0.2% and turning negative, leaving net exports to support overall growth and threatening to plunge the country back into recession.
"Slower global growth and a strong yen will hit exports in the second half, making a return to recession ever more likely. At the same time, there is no prospect of an end to deflation," says Lombard Street Research economist Michael Taylor.
He says the Japanese authorities are struggling to deal with the economy's underlying problems. The Bank of Japan is trying to boost lending to a corporate sector where there is little demand for credit, while a large public sector deficit is making fiscal policy largely ineffective.
Fidelity's Anthony Bolton emphasises the superior domestic demand found in China. "China's domestic economy will show better growth than most other regions in the world. My enthusiasm for China after three months in the region is unstinted. I believe many areas in China will show rapid progress over the next 10 years," he says.
Goldman Sachs predicts China will be the world's largest economy by 2027, and may account for 11.1% of world output by 2014, up from 3.7% today, according to IMF estimates. China overtook Germany to become the world's largest exporter in 2009, accounting for an estimated 9.9% of global exports last year.
