FT: Japan falls back into recession

The figure, well below expectations of a 0.3% fall, is a fresh blow to Prime Minister Shinzo Abe's efforts to end deflation and revitalize economic growth, the report says.

Although there is little sign of the economy entering a downward spiral — Japan's declining population means it is always close to recession — the contraction does point to sluggish underlying demand.

That will make it harder to persuade companies to raise wages and investment next year — which the Bank of Japan regards as essential for progress towards its goal of 2% inflation.

"Two consecutive quarters of contraction, which is called 'technical recession,' probably gives the impression that Japan's economy is in trouble," said Masamichi Adachi at JPMorgan in Tokyo. "However, the third-quarter contraction was mainly driven by a sharp fall in inventories."

Companies running down their inventories, rather than building up stocks, knocked 2.1 percentage points off annualized growth. That more than offset an unexpectedly strong contribution of 1.2 percentage points from consumption and 0.4 percentage points from net exports.

By their nature, inventories can only fall so far. Stripping out that effect, the figures suggest private demand grew at a strong annualized rate of 1.4%.

Figures for the second quarter were revised upwards from a contraction of 1.2% to a contraction of 0.7%.

"Corporate profits are at a record level and employment income is still rising," said Yoshihide Suga, the government's chief cabinet secretary. "The basic trend is gentle recovery."

But investment remained weak, knocking 0.7 percentage points off the annualized growth rate. Abe is pushing Japanese companies to invest more but they often choose to do so overseas.

"Unlike in 2014, when the consumption tax was raised, the economy contracted for two quarters in a row without any exogenous or systemic shocks, which in our view highlights its underlying weakness," said Kiichi Murashima at Citigroup in Tokyo.

Japan's government is preparing a supplementary budget to boost the economy. It has signaled a bad gross domestic product figure could persuade it to expand that stimulus.