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Japan's economy slides further towards recession

The country's fifth in 15 years.

Japanese gross domestic product (GDP) contracted by 0.9 per cent between July and September, as anaemic domestic consumption dovetailed with stagnant western demand and souring relations with China to derail the world's third largest economy.

Shrinking at its sharpest rate since the Fukushima disaster in early 2011, Japan posted a 3.5 per cent contraction in GDP from last year.

Japan has been desperately seeking recovery from last year’s earthquake and tsunami, but despite robust growth in early 2012 – driven by the reconstruction of the country’s northeast in the wake of the disaster – a number of factors have significantly hampered recovery.

A 5 per cent fall in exports – a crucial driver of Japanese growth – accounted for the bulk of the third quarter contraction, comprising 0.7 percent of the 0.9 per cent fall in GDP.

Sluggish US recovery and the ongoing eurozone debt crisis weighed heavily on demand for exports, with technology titans Sony and Panasonic representing two of the many Japanese companies posting significant losses due to the ongoing global downturn.

Worse still, the deteriorating economic climate in the West has prompted numerous investors to pile into the yen, which is regarded as a safe-haven asset in the current environment. Accordingly, the yen has appreciated 5 per cent against the dollar and 8.5 per cent against the euro, rendering exports more expensive and thus less competitive.

Meanwhile, anti-Japanese sentiment in China – Japan’s primary trading partner – has reached fever pitch as the ongoing territorial dispute over the Senkaku-Diaoyu islands rages on. Widespread boycotts of Japanese goods have hit exports hard, particularly within the automotive sector, with Nissan, Honda, and Toyota all posting major losses.

Overall, Japan’s trade deficit reached a whopping ¥980bn (£7.8bn) in September – its largest in almost 30 years.

On the domestic front, modest stimulus measures by the Bank of Japan have had a hollow effect. Private consumption – which accounts for roughly 60 per cent of the economy – fell by 0.5 per cent in the third quarter.

“The decline in exports seems large. Consumption and capital expenditure were also weak, showing that both external and domestic demand are weak”, Yasuo Yamamoto, an economist at Mizuho Research Institute in Tokyo, told the BBC.

The figures are expected to be even worse for the final quarter of 2012, which has stoked fears of looming recession, defined as two quarters of sustained GDP contraction.

“I cannot deny the possibility that Japan has fallen into a recession phase”, Japan’s economy minister, Seiji Maehara, told reporters upon the release of the figures.

The data has piled pressure on the government to counteract the slide into recession. But with a 3.2 per cent decline in capital expenditure, economic malaise and the vice-grip of uncertainty are likely to continue stifling investment regardless of further stimulus plans.

“There is very little demand for credit. In fact, Japanese firms are holding back on capital expenditure”, Junko Nishioka, an economist at RBS Securities, told the BBC

Alex Ward is a London-based freelance journalist who has previously worked for the Times & the Press Association. Twitter: @alexward3000