REMEMBER WHEN THE JAPANESE WERE NINE FEET TALL? – AT 9:28 A.M. ET:  My, how the Emperor's subjects have fallen.  Japan has just lost its place as the second largest economy, yielding the distinction to China. 

TOKYO -- Japan lost its place as the world's No. 2 economy to China in the second quarter as receding global growth sapped momentum and stunted a shaky recovery.

Gross domestic product grew at an annualized rate of just 0.4 percent, the government said Monday, far below the annualized 4.4 percent expansion in the first quarter and adding to evidence the global recovery is facing strong headwinds.

The figures underscore China's emergence as an economic power that is changing everything from the global balance of military and financial power to how cars are designed. It is already the biggest exporter, auto buyer and steel producer, and its global influence is expanding.

China has been a major force behind the world's emergence from deep recession, delivering much-needed juice to the U.S., Japan and Europe. Tokyo's latest numbers, however, suggest that Chinese demand alone may not be enough for Japan or other economic giants.

"Japan is the canary in the goldmine because it depends very much on demand in Asia and China, and this demand is cooling quite a bit," said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. "This is a warning sign for all major economies that just focusing on overseas demand won't be sufficient."

COMMENT:  For some reason, we just don't take the challenge of China seriously enough.  Its military is growing rapidly, and is a clear threat to American dominance of the Western Pacific.  It manufacturing sends huge numbers of electronic devices and other products to the U.S. each year.  And, bottom line, it holds much of the American national debt. 

At the same time, China is plagued with internal problems, including, as my friend Gordon Chang points out, a discontented population.  So China becomes one of those "on the one hand, on the other hand" cases.  On the one hand, it is growing in power.  On the other hand, that power can be compromised by internal rot. 

But the decline of Japan is remarkable.  How many books were on bestseller lists in the last few decades describing the Japanese economic miracle? 

There are no final winners.  There are only temporary gainers.  The U.S. is going through hard times right now, but don't underestimate the ingenuity of the American people.  The question is whether a statist administration will allow those people to breathe and dream.

August 16, 2010