China and Japan, moving apart

By K.N.C. | TOKYO

NOTHING stays the same forever. This week, fresh economic data confirmed what everyone has known since last summer: China surpassed Japan to be the world's second-largest economy sometime in 2010.

What do the figures mean? China is number two in market exchange rates, in American dollars. In terms of purchasing power parity (which takes into the account the differences in prices in different economies), China became second largest many years ago. And in terms of per capita GDP, the Chinese only enjoy one-tenth the national income of the Japanese. It will take a long time for China to catch up in that respect: they number 1.3 billion people, while Japan's population is declining (which could actually boost their well-being by this measure, provided the economy does not shrink).

Milestone moments like this are artificial. But they serve as good a time as any to remind ourselves of the central message of the I Ching, China's "Book of Changes": all is in motion; nothing remains the same. And Japan surely sped up this day's coming by failing to reform its economy. Now the question is, what will the future look like?

Based on current trends, China is on track to become the world's largest economy in around 15 years. Japan also looks poised to shed its third-place rank: the economy is largely stagnant and its politics is a mess.

But before one leaves it at that, it is useful to remember that events rarely flow in predictable ways. Thirty years ago the Japanese economy was widely hailed as being on track to supersede America's, yet it got waylaid for a breathtaking two decades. No one forecast that degree of stagnation—not even The Economist's former editor, Bill Emmott, whose 1989 book "The Sun Also Sets" foretold many of the problems that eventually walloped Japan.

Today a similar set of historical blinders are worn. It is taken as a given that China's growth is only going to continue going up and up. To be sure, critics talk of bubbles and shocks and rebalancing. Some hedge funds hope to make a packet shorting the country. There are even doomsday whispers of an economic crisis forcing a political crisis that sets the country back dramatically. The Economist regularly sounds these warnings, as when it points out political risk. But together, the criticisms are not taken very seriously, and haven't seemed to dramatically change corporate decisions or the flows of foreign direct investment.

In short, people seem to treat the inevitability of China's economic rise as they did Japan's. But history has the last word—and it is a jokester. Nothing goes up forever. In the long term, China will be number one and Japan will atrophy—that is almost certain. Demographics is destiny, after all. In the medium term, however, it is not so certain. Even Japan has been making huge strides to revitalise its economy. What has changed may change again.