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Japan’s Economy Contracts in Q3

Exports dropped steeply as consumers cut back on spending.

TOKYO — Japan’s economy contracted in the third-quarter of the year, as exports slumped and consumers cut back on spending.

Japan’s gross domestic product declined 0.9 percent from July to September and slumped 3.5 percent on an annualized basis, Japan’s Cabinet Office said Monday.

Observers and economists will be eyeing fourth-quarter GDP data, which could also dip into negative territory. If the country posts two consecutive quarters of GDP contraction, it will slip back into an official recession.

Exports for the country, the world’s third largest economy after the United States and China, slid 5 percent in the third quarter while private consumption decreased 0.5 percent. This is the second consecutive quarterly drop in private consumption.

“We expect no major improvement in the export environment before the end of 2012, and thus we see a high likelihood of further GDP contraction in Q4. We project a return to growth in 2013 Q1, however, as inventory adjustments end in China and exports pick up to China and other parts of Asia,” Nomura economists wrote in research distributed Monday.

Japan’s exports were expected to take a hit in the period amid ongoing political tensions over a territorial dispute with China, its largest trading partner.

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Last month, Japan’s Ministry of Finance said that September exports to China declined 14.1 percent — although it’s still rather unclear just how much the territorial dispute and Chinese boycotts of Japanese products accounted for the drop. The fact that China’s economy is slowing down could also be playing a role.

The Nikkei 225 index shed 0.93 percent to close at 8,676.44 on Monday. Retailers were some of the hardest hit stocks. Isetan Mitsukoshi Holdings shed 3.3 percent while Takashimaya lost 3 percent. Fast Retailing fared much better, dropping just 0.24 percent during the session.