'The Japanese economy's share in the world has been declining... Japan's status as 'the world's second largest economy' is drawing to an end,' the Ministry of Economy, Trade and Industry admitted in an annual report.

The International Monetary Fund has predicted China's gross domestic product will exceed Japan in 2010, it noted, saying its Asian neighbour could even take second spot this year if it achieves high growth and Japan stays in recession.

Japan's economy contracted an annualised 14.2 per cent in the first three months of 2009, its worst performance on record, although Tokyo said this week it believed the economy had hit bottom.

The trade ministry report recommended Japan take on reforms to prevent a further decline as a national power.

'Japan for the first time finds itself in the position of being caught up with and surpassed,' the report said, noting that since opening up 150 years ago, and again after World War II, it had sought to match up to the West.

The report said the United States and Europe had experienced similar hardship in the 1970s and 80s, but they have achieved growth through innovation in information technology and the financial fields.

The ministry proposed Japan seeks to become 'a trouble-shooting nation for global issues' by providing solar power and energy-saving systems to other countries and by funding infrastructure in financially strapped economies.

The report also warned against protectionism on the back of the global economic slump.

'The temptation for protectionism always grows when the economy worsens, but we must not repeat the history of protectionism reducing world trade, triggering global recession and then World War II,' it said. -- AFP