Japan slump adds to woes over global economy

A shock slump for Japan rang new alarm bells over global growth prospects yesterday as the world's third-biggest economy was braced to plunge back into recession.

The dire figures – which showed Japan's economy shrinking at an annual pace of 3.5 per cent between July and September – come days before the eurozone's slide back into a double-dip recession is set to be confirmed. Fears are also mounting over the impact of the "fiscal cliff" of spending cuts and tax rises in the US, while the UK is back in the danger-zone after a Jubilee and Olympics-inspired boost over the summer.

Japan's diplomatic row with China over the sovereignty of islands in the East China Sea – which triggered widespread boycotts of goods from major car makers such as Nissan and Toyota – partly fuelled a 5 per cent slump in exports over the quarter.

But the numbers also pointed to a wider malaise, with public spending the only area of the Japanese economy to show growth.

Capital Economics' David Rea said: "Japan's economy may already be in recession. The sharp fall in GDP was the first contraction this year but increasingly looks like it will not be the last."

The nation has been battling deflation and weak growth for than 20 years since the burst of an asset bubble in the early 1990s, with last year's tsunami and earthquake adding to its headaches.

Japan has also been hit by a rising yen as woes elsewhere encourage investors to park their cash in a safe-haven currency, deterring investment and hitting its competitiveness.

Uncertainty in Europe is also affecting Japan. Exports to the EU plunged 23 per cent in the third quarter, the biggest decline since 2009.