Japan's economy unexpectedly shrank at an annualized real rate of 1.2 percent in the July-September period, the first contraction in four quarters, government data showed Tuesday after imports surged and private consumption was sluggish as accelerating inflation dampened sentiment.

The growth figure came against the average market forecast of a 1.2 percent expansion in a Kyodo News survey, boding ill for the government of Prime Minister Fumio Kishida, which recently drew up an economic package to ease the pain on households from soaring inflation.

Real gross domestic product, adjusted for inflation, fell 0.3 percent from the previous quarter, according to preliminary data released by the Cabinet Office.

The contraction, coming only three months after Japan saw its GDP recover to pre-pandemic levels, underscores the fragility of the world's third-largest economy with its potential growth rates remaining persistently low.

Accelerating inflation, which has topped the Bank of Japan's 2 percent target, has weighed on consumer sentiment. It comes at a bad time for Japan, whose economic recovery has been slower compared with its global peers.

A gain in imports can work as a negative for GDP, which measures the total value of goods and services created in a country. Surging energy costs, exacerbated by Russia's war in Ukraine, have dealt a blow to Japan's economy.

Imports jumped 5.2 percent, faster than exports which grew 1.9 percent. Seen as a temporary factor, a sharp increase in advertisement-related service payments to overseas firms also boosted the imports figure, a Cabinet Office official said.

"Energy imports gained and the sharply weaker yen boosted import prices. The easing of supply bottlenecks overseas also helped. Higher imports are not all bad, because they can also reflect the strength of domestic demand," said Yuichi Kodama, chief economist at the Meiji Yasuda Research Institute.

"Still, there is no doubt that the economy is also headed for a slowdown," Kodama said. "The yen's depreciation was so rapid recently that companies have not been able to fully pass on higher costs, so more price hikes are coming. That would be a negative for consumers, and private consumption will likely take a hit in the current quarter.

In the three months to September, domestic demand was supported by the lifting of COVID-19 restrictions that had weighed on economic activity.

Private consumption, accounting for more than half of the economy, increased 0.3 percent. It marked the fourth straight quarter of gain as people stepped up spending on dining out and other services, but consumption still lacked vigor despite expectations of pent-up demand.

Capital investment, another key component of domestic demand, grew 1.5 percent as companies sought to boost output capacity and build factories for products, such as semiconductors. Public investment rose 1.2 percent.

Japan's economy took a turn for the worse after it grew an annualized real 4.6 percent in the preceding quarter.

Toru Suehiro, chief economist at Daiwa Securities Co., said Japan's economic growth rates have been susceptible to swings in COVID-19 waves.

"The October-December quarter should be a period of growth, but the 'eighth wave' of COVID-19 infections inevitably means that there is a possibility of a dent in the growth rate in January-March," Suehiro said, forecasting that real GDP will grow 1.7 percent for fiscal 2022.

Economists say pent-up demand is widely expected to support the economy, along with a recovery of inbound tourism, which the government is counting on as a visible benefit of the feeble yen that has otherwise led to soaring import costs.

Still, the outlook remains uncertain, as aggressive monetary tightening by major central banks, including the U.S. Federal Reserve and the European Central Bank, has raised fears of a global economic slowdown.

Growth in China, a major trading partner for Japan, is also expected to be hampered by its zero-COVID policy and property woes.

Swimming against a global policy tightening tide, the BOJ has not wavered in its pledge to keep an ultralow rate policy. Governor Haruhiko Kuroda has said the central bank needs to keep tabs on the impact of global rate hikes on financial markets, but the country's relatively slow recovery from the COVID-19 fallout means the economy still has more room for growth.

The BOJ's dovish stance has been blamed for accelerating the yen's depreciation that prompted in September Japan's first yen-buying intervention since 1998.

Nominal GDP shrank 0.5 percent, or an annualized 2.0 percent.


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