CNN 2010-08-20

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AZUZ: And that's where things get a little tricky¹. See, Japan has been the world's second largest economy, but China is catching² up. According to a new report, over the last quarter -- the last three months -- China passed Japan. That doesn't necessarily mean China has taken over the number 2 spot. We have to wait until the end of the year to find out about that. But as Emily Chang explains, it might be a foregone conclusion.

EMILY CHANG, CNN CORRESPONDENT, BEIJING: According to these new numbers, Japan's economic output in the second quarter fell slightly short of China's. Now, for a long time, it has not been a question of if, but when China's economy would overtake Japan's as the second largest economy in the world. But, and this is a big but, if you look at the numbers for the first half of this year so far, Japan's economy is still bigger than China's. So, analysts³ are saying we have to wait until after the end of this year, until we get the final numbers for 2010, before we can make a judgment⁴ on this.

There are a lot of factors at play here. In Japan, the economy is obviously slowing down, stimulus⁵ efforts are slowing down, exports are down and domestic demand is flat. The yen⁶ is also at a 15-year high against the dollar, so that makes Japanese exports more expensive for overseas customers.

But here in China, the economy is also showing signs of slowing down. GDP growth in the first quarter fell from 11.9 percent to 10.3 percent in the second quarter, and stimulus efforts here are also on the verge⁷ of slowing down. And if indeed China does revalue its currency soon, that would make Chinese exports more expensive for overseas customers.

So analysts, while most of them seem to agree that China will overtake Japan as the second largest economy in the world some time this year, we do have to wait for those annual numbers for 2010 to come out. Emily Chang, CNN, Beijing.