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The Japanese economic system has experienced a contraction for the first time in a year and a half, mainly caused by weakening exports due to newly imposed US tariffs.

G7 Economic Leaderboard

The Japanese economy stands as the first G7 country to announce an economic contraction in the most recent quarter.

As the United States yet to publish its GDP figures for the third quarter, the current Group of Seven growth leaderboard indicate:

• France: +0.5% quarterly growth
• UK: 0.1 percent
• Canadian economy: +0.1% (provisional estimate)
• Germany: 0%
• Italy: no growth
• Japanese economy: -0.4%

Tourism Stocks Slump amid Diplomatic Dispute with Beijing

Alongside the economic contraction, Japan is experiencing an intensifying diplomatic dispute with China concerning Taiwan.

Stocks in Japanese tourism and retail companies have declined significantly after China urged its citizens to avoid traveling to Japan.

This decision by Chinese authorities heightened a diplomatic feud that was initiated by remarks from Japan's new PM about the possibility of sending troops in the case of a potential Chinese invasion on Taiwan.

The development caused a surge of sell-offs across Japanese leisure shares.

• Oriental Land stock fell by 5.7%
• Isetan Mitsukoshi plummeted by 11.3 percent
• The national carrier fell by 3.75 percent

"The ongoing tension over Taiwan and Beijing's travel warning advising against visits to Japan introduces near-term headwinds for consumer-facing sectors.

"Tourists from China account for roughly 25% of Japan's international visitors, making department stores, luxury retail, and hospitality especially at risk."

Economic Contraction Breakdown

Japan's GDP dropped by 0.4% in the July-September quarter, as manufacturers' exports were affected by tariffs levied by the US this year.

Exports were a key driver of the decline, dropping by 1.2% compared with the previous quarter, and were 4.5 percent lower than a year ago.

Previously, the US administration had proposed Japan with a additional 25% tariff on its products, which was later reduced to 15 percent when the two countries concluded a trade deal.

Private demand also fell, by 0.3 percent quarter-on-quarter.

On an annualized basis, Japan's real gross domestic product contracted by 1.8 percent in the three months through September.

"The Japanese economic situation was strong in the initial six months of this year and the latest GDP figures showed that momentum is halted temporarily.

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

The White House has lately acknowledged the impact of tariffs on US consumers, reducing duties on imported food products including beef, produce, beverages and bananas amid increasing concerns about rising costs.

Business Calendar

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