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Japan's economy has shown a contraction for the initial time in a year and a half, largely driven by declining overseas shipments due to newly imposed US trade duties.

Group of Seven Economic Standings

Japan stands as the first G7 country to announce an economic contraction in the previous three-month period.

With the US yet to publish its gross domestic product figures for the third quarter, the present Group of Seven economic leaderboard show:

• France: +0.5% quarterly growth
• UK: 0.1 percent
• Canada: +0.1% (preliminary figure)
• German economy: zero growth
• Italian economy: 0%
• Japan: -0.4%

Tourism Stocks Slump during Diplomatic Dispute with Beijing

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

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

This action by Chinese authorities escalated a diplomatic feud that was initiated by remarks from Japan's new PM about the potential of deploying forces in the event of a hypothetical Chinese attack on Taiwan.

The development triggered a surge of selling across Japanese leisure shares.

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

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

"Chinese visitors account for roughly 25% of Japan's international visitors, making retail outlets, high-end shopping, and tourism services particularly vulnerable."

Economic Decline Details

Japan's gross domestic product fell by 0.4% in the July-September quarter, as industrial overseas shipments were impacted by tariffs levied by the US recently.

Overseas shipments were a key factor of the decline, dropping by 1.2% compared with the April-June quarter, and were 4.5% lower than a year ago.

Earlier this year, the American government had threatened Japan with a additional 25 percent tariff on its goods, which was later reduced to 15% when the two nations reached a trade agreement.

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

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

"The Japanese economic situation was stable in the first half of this year and the latest GDP data showed that momentum is halted temporarily.

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

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

Business Agenda

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