China overtakes Japan as world's second-biggest economy
Japan's economy was worth $5.474 trillion (£3.414 trillion) at the end of 2010, figures from Tokyo have shown. China's economy was closer to $5.8 trillion in the same period.
Japan has been hit by a drop in exports and consumer demand, while China has enjoyed a manufacturing boom.
World's 10 biggest economies
At its current rate of growth, analysts see China replacing the US as the world's top economy in about a decade.
"It's realistic to say that within 10 years China will be roughly the same size as the US economy," said Tom Miller of GK Dragonomics, a Beijing-based economic consultancy.
The US economy is currently almost three times the size of the Chinese economy in dollar terms. The UK's economy is estimated to be the world's sixth largest.
Japan played down the significance of the shift in the economic league table, and the fact that it has been replaced as the second-largest economy for the first time in more than four decades.
"As an economy, we are not competing for rankings but working to improve citizens' lives," said Economics Minister Kaoru Yosano.
The minister added that China's booming economy was welcome news for Japan as a neighbouring country.
China is now Japan's main trading partner and is increasingly important to companies such as electronics firm Sony and carmakers like Honda and Toyota.
However, Mr Yosano said that Japan needed to watch closely "risks from overseas economies and currency moves".
The yen has been strengthening against other currencies, recently touching a 15-year high against the dollar, and the fear is that the currency's gains may hurt foreign demand for Japanese products.
According to the latest figures from Tokyo, Japan's economy contracted at an annualised rate of 1.1% in the final three months of 2010. Growth declined 0.3% from the previous quarter.
It was the first time in five quarters that the economy had contracted and it was caused by a dip in domestic and export demand, analysts said.
Consumer spending fell 0.7% in the final three months of 2010, the figures showed.
Analysts said that while demand had been picking up since the start of the year, there would not be a sudden revival in Japan's economic fortunes.
Not least because government plans to boost consumer spending by giving incentives to buy products such as consumer durables had either finished or were about to end.
"The main reasons for the contraction are the expiry of government stimulus measures and negative external demand," said Takeshi Minami, chief economist at Norinchukin Research Institute.
"It is going to be difficult for the economy to emerge from a lull in the January-March period.
"We are unlikely to see the economy worsen, but the recovery will not be strong enough for people to actually feel it is happening."
Japan has been struggling to come to terms with what many analysts call the "lost decade" of the 1990s when a property market and asset crash turned the economy on its head.
Domestic demand tumbled and exports also dropped as consumers looked for cheaper products from other emerging markets, and China in particular.
Today, Japan's biggest headaches are an ageing population that is spending less, and a workforce that is relatively expensive and inflexible to operate.
By contrast, the majority of China's growth has been funded by a long-running manufacturing boom and the subsequent expansion of its domestic industries and infrastructure.
"There was an emphasis on infrastructure," said Duncan Innes-Ker of the Economist Intelligence Unit (EIU) in Beijing.
"They were building way ahead of where people thought the demand would be. And because the infrastructure was there, companies went there."
Most economists agree that while China as a whole is growing, and the average person is getting wealthier, comparing only the size of its economy to Japan's does not paint an accurate enough picture.
"Most people in China are still poor, more people live in the countryside than in cities," said Mr Miller of GK Dragonomics.
"The average Japanese person is much much richer than the average Chinese person."
The International Monetary Fund estimates that GDP per head of the population is almost $34,000 in Japan, while in the People's Republic of China it is just over $7,500.
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