Japan has been the world's second largest economy since 1968 but has recently suffered from a drop in exports and consumer demand.

China, meanwhile has been riding high on a manufacturing boom.

At the end of 2010 China's economy was worth close to $5.8 trillion.

Japan's was worth $5.474 trillion (£3.414 trillion).

If China maintains its current rate of growth, it will replace the US as the world's top economy in ten years.

The Economics Minister of Japan reacted calmly to Japan's fall in the world economic league table.

"As an economy, we are not competing for rankings but working to improve citizens' lives," said Economics Minister Kaoru Yosano.

China is Japan's main trading partner and The Minister said that it is good for Japan for its neighbour to have a healthy economy.

However, he is aware that Japan must remain vigilant and closely monitor "risks from overseas economies and currency moves".

Recently, the Yen reached a 15 year high against the dollar and has been strengthening against other currencies too.

The worry for Japan is that the currency's gains will lessen foreign demand for Japanese products.

Between October and December 2010 Japan's economy contracted at an annualised rate of 1.1 per cent.

Growth declined 0.3 per cent from the previous quarter.

This is the first time in five quarters that Japan's economy has contracted, with Japan suffering from a fall in export and domestic demand.

Analysts believe it is unlikely that the Japanese economy will suffer much more, and demand has been increasing this year.

However, neither are they forecasting a sudden improvement.

This is partly because the Japanese government are ending their plans to boost consumer spending through incentives to buy products such as consumer durables.

China as a whole may be growing but Japan still has a much higher GDP than China.

"GDP per head in China is about $4,500, but in Japan it's about $40,000 per head," said Mr Miller of GK Dragonomics.

"Most people in China are still poor, more people live in the countryside than in cities. The average Japanese person is much much richer than the average Chinese person."