TOKYO, Feb. 14 (Xinhua) -- Japan's gross domestic product fell an annualized 1.1 percent in the fourth quarter in 2010 marking the first decline in five quarters due to a drop in exports, diminishing government stimulus programs and weak consumer consumption, the Cabinet Office said in a preliminary report on Monday.
According to the data, Japan has now relinquished its position as the world's second largest economy to China.
Japan's nominal GDP, before adjustments for prices, totaled 5. 47 trillion U.S. dollars in 2010, paling before China's figure of near 5.8 trillion U.S. dollars. Japan has held the title of world' s second largest economy for 42 years.
"We are not engaging in economic activities to vie for ranking but to enhance people's lives. From that point of view we welcome China's economic advancement as a neighboring country," Chief Cabinet Secretary Yukio Edano said at a press briefing on Monday.
"The important thing is to incorporate such vitality of China to seek growth in the Japanese economy," Edano continued.
Japan's Economic and Fiscal Policy Minister Kaoru Yosano said that Japan wants to deepen its "friendly and favourable" economic ties with China.
Economists said that slowing demand from emerging economies, particularly in Asia, coupled with a strong yen which reached 15- year high against the U.S. dollar during the recording period, weighed heavily on Japanese exports.
"If the yen resumes its gains or Japan finds it difficult to emerge from deflation by the end of fiscal 2011, there could be calls for further monetary easing," said Norio Miyagawa, senior economist at Mizuho Securities Research and Consulting Co. in Tokyo.
Analysts and government officials have predicted, however, that Japan will continue on a growth path in the January-March quarter as an upturn in the U.S. economy and demand for Japanese goods from the U.S. and its Asian neighbors has shown signs of increasing.
"The data for the October-December quarter underscored that the economic condition is at a standstill," Yosano said, but added that "the situation surrounding Japan's economy is not necessarily bad amid bright signs seen in the U.S. economy for example."
"The Bank of Japan and the government have the same view that the economy seemingly is at a standstill, but will turn upward," Yosano said.
The annualized 1.1 percent drop was less than economists' median forecast for a 2.1 percent contraction, but private consumption remains a concern, slipping 0.7 percent in the recording period, after government incentives for purchases of fuel-efficient cars expired in September.
Private consumption accounts for about 60 percent of Japan's economy.
Capital spending rose 0.9 percent, however, marking the fifth straight quarter of increase, but the pace slowed from the previous quarter's 1.5 percent rise, the figures showed.
The government said that exports and imports both retreated in the October-December period for the first time in seven quarters and net exports shed 0.1 percentage point off Japan's GDP growth in October-December, making a negative contribution for a second straight quarter.
"It is difficult for the deflation-plagued Japanese economy to achieve self-sustained growth," said Naoki Murakami, chief economist at Monex Securities.
"But the contraction will not last long. Companies' manufacturing activities are recovering rapidly in January-March this year from their bottom in October 2010," he said.
Many analysts such as those at the World Bank and Goldman Sachs have been quoted as saying that in their opinion China may overtake the United States as the number one economy by 2025.