TOKYO — Japan’s economy contracted in the fourth quarter of last year, allowing China to overtake it as the world’s second-largest economy after the United States in terms of annual GDP.


Japan’s Cabinet Office said Monday that the country’s fourth-quarter GDP slumped 1.1 percent in real, seasonally adjusted and annualized terms as the government’s stimulus measures ran out. These figures are preliminary and are subject to frequent and large revisions. For example, the most recently revised third-quarter GDP rose 3.3 percent while previous estimates had it growing at rates of 3.9 percent and then 4.5 percent.


Japan’s fourth-quarter GDP fell 0.3 percent from the previous quarter and Susumu Kato, chief economist at Crédit Agricole Corporate and Investment Bank in Tokyo, said the results were better than the market consensus for a 0.5 percent drop and his bank’s forecast for a 0.4 percent drop.


He characterized the fourth quarter as a temporary “pause” coming on the back of four stronger quarters of growth from the fourth quarter of 2009 through the third quarter of this year. Kato said he expects to see the economy pick up in the first part of this year at a more “sustainable” pace.


“We expect to see moderate growth into January-March 2011,” he wrote in his report.


China has overtaken Japan before in quarterly terms but this is the first time the fast-growing economy has eclipsed Japan in terms of the annual figures. China’s economy grew 10.3 percent in 2010 while that of Japan advanced 3.9 percent.


Japan is grabbling with a number of problems including deflation and an enormous public debt. Consumers have been cutting back on their spending although government stimulus measures lifted sales of cars and environmentally friendly appliances earlier in the year. Those incentives have run out and fourth-quarter public consumption declined 0.7 percent from the third quarter.


“The most important thing is [the large quarter-on-quarter decline] in real consumption expenditures,” Kato wrote. “We forecast moderate return of consumption behavior into 2011.”


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