Japan's economy shrank an annualized real 2.9 percent in July-September, sharper than the previously reported 2.1 percent, hurt by weaker-than-expected private consumption and slowing growth of exports, government data showed Friday.
Real gross domestic product, adjusted for inflation, declined 0.7 percent from the previous quarter, against its earlier reading of a 0.5 percent contraction.
The world's third-largest economy marked its first negative growth in four quarters. GDP is the total value of goods and services produced in a country.
Private consumption, which makes up over half of GDP, dropped 0.2 percent, rather than a 0.04 percent fall, as rising prices of everyday goods dented household sentiment.
Capital investment, another key gauge of domestic demand, was revised up to a 0.4 percent decrease from its earlier reading of a 0.6 percent drop.
"While the underlying recovery trend is not yet over, both private consumption and capital spending in the GDP data were weak. Caution is warranted," said Yoshimasa Maruyama, chief economist at SMBC Nikko Securities.
"For households, inflation is working as a negative because wage growth is more than offset by rising prices. It will take some time for (inflation-adjusted) wage growth to turn positive," Maruyama said
Weakening domestic demand poses a challenge to the government when it is seeking to ease the pain on consumers due to the double whammy of pricier everyday goods and falling wages.
The slowdown in the economy gives the Bank of Japan reason to persist with ultralow rates, but with headline inflation sitting above the central bank's long-term target of 2 percent for more than a year it is becoming increasingly difficult for the public to accept the view that the inflation goal has not yet been achieved stably through wage growth.
Exports grew 0.4 percent, slightly slower than 0.5 percent in the preliminary data, while imports increased 0.8 percent, a downward revision from 1.0 percent.
Nominal GDP was slightly revised upward to an annualized 0.05 percent fall from a 0.2 percent decline.
Robust exports had supported the economy in previous quarters despite aggressive rate hikes in major economies calling into question the sustainability of strong export growth. China's slowdown has become another source of concern.
While BOJ Governor Kazuo Ueda has underscored the need to maintain monetary easing, his remarks on Thursday that it will become all the more "challenging" from the end of the year into 2024 fueled market speculation that an exit will come sooner than expected. The yen subsequently surged relative to the U.S. dollar.
SMBC's Maruyama expects the economy to rebound in the October-December quarter but the BOJ will take a wait-and-see stance ahead of annual wage negotiations between labor unions and management next spring.
Prime Minister Fumio Kishida has pointed to the risk of Japan slipping back into deflation, or prices continuously falling, without sustained wage growth.
Later this month, the government will draw up a budget plan for the next fiscal year from April, on top of the recently-enacted 13.20 trillion yen ($92 billion) extra budget for fiscal 2023 to implement inflation-relief steps, such as subsidies to lower fuel costs and payouts of 70,000 yen to low-income households.