Japan officially confirmed on Monday that it lost its rank as the world's second largest economy to China in 2010.

Official data released by Japan indicated that fall in the overall spending and a strong yen facilitated a contraction during the last quarter of the fiscal year.

The Associated Press reported that although Japan's economy raised 3.9 percent in the calendar year indicating the first annual growth in three years, it was not sufficient to hold off a surging China. There was a fall in the nominal GDP of China last year which was around $5.4742 trillion as compared to China's total of $5.8786 trillion.

The second quarter of China saw a boost in economy at an annual rate of 10 percent particularly during the last 3 months of the year.

For around four decades, Japan has been just two steps behind the US as a global economic power. But post a year-long recession in2009, the country has been struggling to recover severe debts, decrease in domestic demand and a strong yen.

Besides, a hike in tobacco tax and surging of yen in the country led to slipping of both private consumption and export levels. The economy of neighboring China, on the other hand, has been indicating a northward trend with predictions of even overtaking the US as number one economy by 2025.