Strong yen thwarts China’s rise as second largest economy

In a seeming paradox, China may not be able to overtake Japan as the world's second largest economy this year, but that may not be good news for Japan either as a strengthening yen may end up hurting the Japanese economy.

The official Xinhua news agency reported Sunday that China's chances of replacing Japan as the world's second largest economy in 2010 may have shrunk even as an unannounced currency war is now being waged amongst nations and the Japanese yen continues to strengthen.

It is this constantly strengthening yen which may have frustrated China's bid to topple Japan from its perch as the world's second largest economy. China has already overtaken Germany as the world's largest exporter and also holds the world's largest reserves of foreign exchange.

In yet another paradox China may also be contributing its bit to strengthen the yen by purchasing short term Japanese debt in huge quantities.

It was widely anticipated, and forecast, that China would overtake Japan this year, but it now appears that the Japanese economy, when measured in US dollars, is expected to remain in second place for the time being, next only to that of the United States.

According to Xinhua, at an exchange rate of 85 yen per dollar Japan's GDP for this year will reach $6.35 trillion, compared to an estimated $5.67 trillion for China. With the rapidly appreciating yen currently trading at around 81 per dollar, Japan extends its lead even further.