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Japan's economy has recorded a contraction for the first time in six quarters, mainly driven by declining overseas shipments because of recent American trade duties.

G7 Economic Standings

Japan has become the initial G7 economy to disclose an economic contraction in the most recent quarter.

As the US still needing to release its gross domestic product figures for the third quarter, the present G7 economic rankings display:

• The French economy: +0.5% quarterly growth
• UK: +0.1%
• Canada: 0.1 percent (preliminary figure)
• Germany: zero growth
• Italy: 0%
• Japanese economy: -0.4%

Tourism Shares Slump during Political Rift with China

Alongside the GDP decline, Japan is experiencing an intensifying political tension with China concerning Taiwan.

Stocks in Japan's tourism and retail firms have dropped sharply after China recommended its nationals to refrain from traveling to Japan.

This decision by Beijing intensified a political dispute that was triggered by statements from Tokyo's new prime minister about the potential of deploying forces in the case of a hypothetical Chinese attack on Taiwan.

The situation caused a surge of selling across Japan's tourism-related shares.

• The Tokyo Disneyland operator stock fell by 5.7%
• The department store chain tumbled by 11.3 percent
• Japan Airlines fell by 3.75%

"The ongoing dispute over Taiwan and Beijing's advisory discouraging visits to Japan creates short-term headwinds for retail and hospitality sectors.

"Tourists from China represent roughly 25 percent of Japan's inbound traffic, making department stores, high-end shopping, and tourism services particularly vulnerable."

Economic Decline Details

Japan's gross domestic product declined by 0.4% in the July-September quarter, as manufacturers' overseas shipments were hit by tariffs imposed by the US recently.

Overseas shipments were a key driver of the contraction, dropping by 1.2% compared with the April-June quarter, and were 4.5 percent lower than a year ago.

Earlier this year, the American government had proposed Japan with a new 25 percent tariff on its goods, which was later lowered to 15% when the two countries concluded a trade agreement.

Private demand also declined, by 0.3% quarter-on-quarter.

On an annual basis, Japan's real gross domestic product shrank by 1.8% in the three months through September.

"Japan's economy was solid in the initial six months of this year and the latest GDP data showed that growth is halted temporarily.

I anticipate Japan's economy to be returning on a moderate recovery trend going forward."

The US administration has lately acknowledged the effect of tariffs on US consumers, reducing duties on imported food products including beef, tomatoes, coffee and bananas amid increasing concerns about increasing costs.

Business Agenda

• 8am GMT: Switzerland GDP report for Q3
• 3pm GMT: US construction spending data for August