Japan economy shrinks, outlook bleak

Pedestrians pass by sale signs in Tokyo on

Pedestrians pass by sale signs in Tokyo on Monday. Japan’s economy contracted in the third quarter in step with forecasts, and a still-bleak outlook predicts it will delve into recession after the next quarter. (Nov. 12, 2012) Photo Credit: Getty

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Japan's economy contracted in the latest quarter, signaling that like Europe it may already be in recession, further weighing down world growth.

On an annualized basis, the world's No. 3 economy shrank 3.5 percent in the July-September quarter, the government reported Monday. It was in line with gloomy forecasts after Japan's territorial dispute with China hammered exports that were already weakened by feeble global demand.

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The bad news will temper optimism over recoveries in China and the United States, where some economists are predicting growth will top 3 percent in the third quarter. China's painful slowdown likely bottomed out in the third quarter, with recent indicators such as factory production and auto and retail sales showing improvement. And Europe, though it may have turned a corner on its debt crisis as the financial system stabilizes, is forecast to get worse before it gets better.

Japan's outlook remains bleak, with most economists forecasting a further decline in economic activity for the October-December quarter, which would officially put it in a recession according to the common definition of two consecutive quarters of contraction.

Consumer spending fell 0.5 percent in the third quarter, as subsidies for auto purchases expired, and corporate capital spending fell 3.2 percent. Spending on reconstruction from the country's March 2011 tsunami and nuclear disasters also has weakened.

"If the economy does recover in any way, it will be a minute rebound," said David Rea, an economist in London with Capital Economics. He said the contraction in gross domestic product in the last quarter of 2012 could be a couple of percentage points.

Machinery orders for September fell twice as fast as expected. Meanwhile, the job market softened, likely hurting prospects for stronger consumer spending to help offset weak exports. Slower-than-anticipated government spending on reconstruction has further undermined demand.

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