Japanese economy shrinks in third quarter, faces recession

BEIJING -- Japan’s economy shrank in the third quarter, raising the specter of a recession in the world’s third-largest economy and tempering hopes of a global recovery.

The Japanese government said Monday its gross domestic product contracted 3.5% on an annualized basis between July and September, the worst drop in growth since the country was battered by an earthquake and tsunami in March 2011.

Japan’s export-dominated economy has been severely distressed by weakened demand from Europe and China, where a territorial dispute over a group of uninhabited islands in the East China Sea sparked a massive Chinese boycott of Japanese goods.

Toyota and Nissan have reported huge sales declines in China.

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Japanese exporters have also been hampered by a strong yen.

Capital expenditure diminished 3.2% as companies such as Sony Corp. and Panasonic Corp. have cut spending in reaction to lost profits.

Meanwhile, consumer spending, which makes up nearly two-thirds of the Japanese economy, shrank 0.5%.

Economists say the Japanese economy will likely shrink for the second consecutive quarter in the final three months of the year, making a recession official.

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“The Japanese economy enjoyed a modest recovery [the first half of the year] thanks to strong private consumption and government reconstruction spending,” Izumi Devalier, an economist for HSBC, wrote in a research note Monday. “But now that these temporary factors have faded and with exports declining at a faster-than-expected pace, GDP has started to contract in sequential terms again. We expect this to repeat in the last quarter of 2012, before economic activity starts to pick up again early next year. However, any delay to the global recovery and further deterioration in China-Japan relations continue to pose significant downside risks to our forecasts.”

The poor Japanese data come while Europe’s debt crisis continues to cast a shadow on any significant rebound in the global economy.

The U.S. has shown modest signs of recovery, and China’s economic slide of nearly two years may have bottomed out in October, according to the most recent government data.

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