Japan’s economy tiptoes towards recession as China row takes toll

On an annualised basis, the world’s No. 3 economy shrank 3.5% in the July-September quarter, the government reported on 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.

The bad news will temper optimism over recoveries in China and the US, where some economists are predicting growth will top 3% 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% 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 has also weakened.

The drop for the current October-December quarter may not be as severe as that experienced in July-September.

“If the economy does recover in any way it will be a minute rebound,” said David Rea, an economist in London with Capital Economics.

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