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Japan third quarter GDP contracts at fastest pace since 2014, trade war dims outlook

Key Points
  • Japanese gross domestic product shrank at an annualized rate of 2.5 percent in July to September, deeper than an initial estimate of a 1.2 percent contraction, revised data from the Cabinet Office showed on Monday.
  • The revised figure was also sharper than economists' median estimate for a 1.9 percent annualized decline in a Reuters poll, hurt by natural disasters and sluggish exports.
College students arrive to attend the Mynavi Shushoku Mega Expo at the Tokyo Big Sight on March 8, 2015 in Tokyo.
Chris McGrath | Getty Images

The Japanese economy contracted the most in over four years in the third quarter as capital expenditure tumbled, raising concerns about demand at home and overseas as the export-reliant nation grapples with global trade frictions.

The gross domestic product shrank at an annualized rate of 2.5 percent, deeper than an initial estimate of a 1.2 percent contraction and against economists' median estimate for a 1.9 percent decline, revised data from the Cabinet Office showed.

That followed a revised 2.8 percent expansion in the second quarter, and marked the sharpest contraction since the second quarter 2014 when the economy was hit by a sales tax hike in April that year.

Economists expect the economy, the world's third largest, to stage a rebound in the current quarter, noting the third-quarter slump was caused in part by natural disasters that disrupted supply chains and factory output.

However, the strength of recovery remains in doubt given cooling global growth, a rising tide of protectionism and slowing company profits.

The revised figure translates into quarter-on-quarter contraction of 0.6 percent in real, price-adjusted terms, against a preliminary reading of a 0.3 percent slide and economists' median estimate of a 0.5 percent decline.

The capital expenditure component of GDP fell 2.8 percent in July-September from the previous quarter, versus the median forecast for 1.6 percent decline, and the preliminary 0.2 percent drop.

That was the sharpest quarter-on-quarter decrease since the third quarter of 2009, the Cabinet Office data showed, raising worries about business spending which has been a bright spot in the economy.

Analysts say capex will be underpinned by corporate demand such as for refurbishing old facilities and boosting investment in automation and labor-saving technology to cope with labor shortages, although the pace of gains will likely be modest.

Private consumption, which accounts for roughly 60 percent of GDP, fell 0.2 percent in July-September from the previous three months, versus 0.1 percent drop seen in the initial estimate.

Domestic demand shaved 0.5 percentage points off the revised GDP figure, while net exports — or exports minus imports — contributed minus 0.1 percentage point.