Japan's economy shrank during the third quarter of 2012, the first time since last year, adding to signs that sluggish global growth and tensions with China are pushing the world's third-largest economy into recession.
On an annual basis, Japan's economy shrank 3.5 per cent in the July-September quarter, in line with forecasts after its territorial dispute with China hammered exports that were already weakened by feeble global demand.
The 0.9 per cent fall in Gross Domestic Product (GDP) was in line with expectations, although a decline in capital expenditure was much steeper than forecast.
"The GDP data confirms that the economy has fallen into a recession," said Tatsushi Shikano, senior economist at
Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
"It is set for a second straight quarter of contraction in the current quarter."
A recession is commonly defined as two consecutive quarters of contraction.
The decline in Japan and the euro zone economies temper global optimism over modest recoveries in the US and China.
Japan's exports fell 5 per cent in July-September, the biggest decline since a 6 per cent decline in April-June last year, the data showed.
A row with China over sovereignty of some islands in the East China Sea led to violent protests in China and the boycott of Japanese goods, which added to the slide in exports, particularly for automakers such as Nissan Motor Co.
Japan's capital expenditure also dropped 3.2 per cent, the fastest pace of decline since a 5.5 per cent drop in April-June 2009, as companies turned more pessimistic about earnings from domestic and overseas markets.
Japan's ailing electronics sector is a good example of the extent to which companies are cutting back on investment.
Sony, for instance, plans to reduce capital spending by 29 per cent in the year to March 2013 and Panasonic plans a 27 per cent cut, after incurring huge losses in their TV manufacturing businesses.
The companies are struggling to compete with more nimble rivals, such as South Korea Samsung Electronics and
America's Apple Inc, and a steady rise in the yen, which makes exports from Japan more expensive.
Meanwhile, private consumption - which accounts for roughly 60 per cent of the economy - fell 0.5 per cent in the third quarter against a median forecast of a 0.6 percent drop.
During the first half of this year, Japan's economy in fact outperformed most of its Group of Seven peers on robust private consumption and spending for reconstruction from last year's earthquake.
But growth has stalled since then. Indeed, second-quarter growth was revised down by half to just 0.1 per cent compared with an initial report.
The last quarterly contraction was in the Oct-Dec period of 2011, when GDP fell 0.3 per cent.
With the economic effect of rebuilding from last year's earthquake and tsunami fading, the government acknowledged last
week that its index of leading indicators gauge fell to a level suggesting the onset of a recession.
"Judging from the coincident indicator index, the economy peaked in March and it is likely to bottom out in October or November, as the global economy is expected to pick up gradually," Mitsubishi UFJ Morgan Stanley's Shikano said.
More than two decades after Japan's asset bubble burst in the early 1990s, its legislators have yet to devise an effective strategy to help the economy break out of its deflationary funk.
Signs of a recovery in China's growth rate offer some hope of stronger demand for Japan's exports - if only territorial tensions are kept in check.
Tokyo's first policy priority should be to defuse the antagonisms with Beijing that caused sometimes violent protests in September, and are fuelling a backlash against Japan and Japanese products, especially cars, said Klaus Baader, a regional economist with Societe Generale Cross Asset Research in Hong Kong.
"I don't think this can be done overnight and I don't think Chinese consumers are going to suddenly rediscover their love of Japanese products,'' he said.
But eventually, "whether it's three or six months, people will forget. And Japanese products are of course highly desirable.''
Japan is also embroiled in a separate diplomatic fight with another trading partner South Korea over a different set of disputed islands in the East China Sea.