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The Japanese economic system has recorded a drop for the first time in a year and a half, mainly caused by falling overseas shipments as a result of recent US tariffs.

G7 Economic Leaderboard

Japan stands as the first Group of Seven nation to announce an output shrinkage in the latest three-month period.

As the US yet to release its GDP data for the third quarter, the current Group of Seven growth leaderboard display:

• The French economy: +0.5% quarterly growth
• UK: +0.1%
• Canada: +0.1% (preliminary figure)
• Germany: 0%
• Italy: 0%
• Japan: negative 0.4 percent

Tourism Shares Slump during Diplomatic Dispute with Beijing

In addition to the GDP decline, Japan is facing an growing diplomatic tension with China concerning Taiwan.

Shares in Japanese travel and consumer businesses have dropped sharply after China urged its nationals to refrain from visiting to Japan.

This action by Chinese authorities escalated a political dispute that was sparked by comments from Japan's new PM about the possibility of sending troops in the case of a potential Chinese attack on Taiwan.

The situation caused a wave of selling across Japan's tourism-related shares.

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

"The ongoing dispute over Taiwan and Beijing's travel warning discouraging travel to Japan creates short-term headwinds for consumer-facing sectors.

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

GDP Contraction Breakdown

Japan's GDP dropped by 0.4% in the third quarter, as industrial exports were hit by tariffs imposed by the US recently.

Exports were a primary factor of the decline, falling by 1.2% compared with the previous quarter, and were 4.5% lower than a the same period last year.

Earlier this year, the US administration had threatened Japan with a new 25% tariff on its goods, which was later reduced to 15% when the two nations concluded a trade agreement.

Private demand also declined, by 0.3 percent compared to the previous quarter.

On an annualized basis, Japan's real gross domestic product shrank by 1.8% in the quarter through September.

"Japan's economy was stable in the initial six months of this year and today's GDP data showed that growth is paused temporarily.

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

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

Economic Agenda

• 08:00 Greenwich Mean Time: Swiss GDP report for Q3
• 15:00 Greenwich Mean Time: US construction spending data for August