China was acknowledged last year as having surpassed Japan, but full-year Japanese data confirming it were not available until today.
The historic shift underscores a stark change in fortunes for the two countries: China is growing rapidly and driving the global economy, while Japan never fully bounced back from the stagnation that followed the bursting of its property bubble.
However, Japan said its economy would be lifted by a rising tide of recovery in key markets such as the US and elsewhere, and would aim to reap the benefits of its booming neighbour and top export market China.
"We are not managing the economy to compete for rankings but to enhance people’s lives," said Kaoru Yosano, minister for fiscal policy.
"We welcome, as a neighbouring nation, that China’s economy is advancing rapidly. This can become a foundation for development of the regional economy, including East Asia and Southeast Asia."
While Japan’s first contraction in five quarters was not as severe as forecasts and over the year the economy grew 3.9pc – its first annual growth in three years – it was not enough to keep it ahead of surging China. China grew nearly 10pc in the final quarter of the year.
Japan posted nominal GDP of $5.474 trillion (£3.42 trillion) in 2010 behind China’s $5.879 trillion, the data showed.
The data underlined the weak state of a Japanese economy burdened by deflation, soft domestic demand and pressured by the industrialised world’s biggest debt.
China’s rise was "unavoidable given the difference in population," said Naomasa Mitsuishi, a 45-year-old salaryman in Tokyo’s Shimbashi district.
"I have no strong feelings about China surpassing Japan, because Japan has little room left for GDP growth compared to China, which is booming."
Japan’s top government spokesman said on Monday that "incorporating" the rapid growth of its neighbour was crucial for a Japanese economy that is boosted by Chinese demand for its autos and electronic goods.
"What’s important is how we incorporate this energy," said Yukio Edano. China posted nearly 10pc growth in the October-December quarter.
Japan’s post-war "economic miracle" put it at number two behind the United States for decades, but stagnation after the Japanese property bubble burst in the 1990s helped put booming China on course to supplant its neighbour.
Although Japan remains around 10 times richer on a per-capita basis, according to the International Monetary Fund, the reponse to the news by the public was one for resignation. "The gap will widen from now on," said Takehide Yoshiura, a 43-year-old salaryman. -Telegraph