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The Japanese economic system has recorded a drop for the first time in a year and a half, primarily driven by falling overseas shipments due to newly imposed US tariffs.

G7 Growth Rankings

The Japanese economy has become the first G7 nation to report an economic contraction in the latest quarter.

With the US still needing to publish its GDP data for the third quarter, the current G7 growth rankings indicate:

• France: +0.5% quarterly growth
• UK: +0.1%
• Canadian economy: +0.1% (provisional estimate)
• Germany: 0%
• Italy: 0%
• Japanese economy: -0.4%

Travel Shares Decline amid Political Rift with Beijing

In addition to the economic contraction, Japan is dealing with an intensifying diplomatic conflict with China regarding Taiwan.

Shares in Japanese travel and consumer firms have dropped sharply after China urged its citizens to refrain from traveling to Japan.

This move by Beijing heightened a diplomatic feud that was initiated by comments from Japan's recently appointed prime minister about the potential of deploying troops in the event of a potential Chinese invasion on Taiwan.

The development caused a wave of selling across Japanese leisure stocks.

• Oriental Land shares dropped by 5.7%
• The department store chain tumbled by 11.3%
• Japan Airlines fell by 3.75%

"The China-Japan tension over Taiwan and China's travel warning discouraging travel to Japan brings short-term challenges for retail and hospitality sectors.

"Chinese visitors represent roughly 25% of Japan's international visitors, making department stores, high-end shopping, and tourism services particularly at risk."

Economic Decline Breakdown

Japan's GDP declined by 0.4% in the July-September quarter, as manufacturers' exports were hit by tariffs imposed by the US this year.

Overseas shipments were a major factor of the decline, falling by 1.2 percent compared with the previous quarter, and were 4.5 percent lower than a the same period last year.

Previously, the American government had threatened Japan with a additional 25 percent tariff on its goods, which was later lowered to 15% when the two nations reached a trade deal.

Consumer spending also declined, by 0.3 percent quarter-on-quarter.

On an annualized basis, Japan's GDP shrank by 1.8 percent in the quarter through September.

"Japan's economy was solid in the initial six months of this year and today's GDP figures showed that momentum is halted temporarily.

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

The US administration has recently acknowledged the effect of tariffs on Americans, lowering tariffs on food imports including meat, produce, beverages and bananas amid increasing concerns about increasing costs.

Economic Calendar

• 08:00 Greenwich Mean Time: Swiss GDP report for Q3
• 3pm GMT: US construction spending data for August