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Japan's economy has shown a contraction for the initial time in a year and a half, primarily driven by weakening exports because of newly imposed American tariffs.

G7 Growth Standings

The Japanese economy stands as the first Group of Seven nation to report an output shrinkage in the most recent three-month period.

With the US still needing to release its GDP data for the third quarter, the current Group of Seven growth leaderboard show:

• France: 0.5 percent expansion
• UK: 0.1 percent
• Canada: +0.1% (provisional estimate)
• German economy: zero growth
• Italy: no growth
• Japanese economy: negative 0.4 percent

Travel Shares Decline amid Diplomatic Rift with China

Alongside the GDP decline, Japan is experiencing an growing political dispute with China concerning Taiwan.

Stocks in Japan's tourism and retail businesses have fallen sharply after China advised its nationals to avoid visiting to Japan.

This decision by Chinese authorities intensified a political dispute that was initiated by statements from Tokyo's new prime minister about the possibility of sending forces in the event of a hypothetical Chinese attack on Taiwan.

The situation led to a wave of selling across Japanese tourism-related stocks.

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

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

"Chinese visitors account for roughly 25% of Japan's inbound traffic, making department stores, high-end shopping, and hospitality particularly at risk."

Economic Contraction Details

Japan's GDP declined by 0.4 percent in the July-September quarter, as manufacturers' overseas shipments were affected by tariffs levied by the United States this year.

Exports were a major driver of the contraction, dropping by 1.2 percent compared with the April-June quarter, and were 4.5% lower than a year ago.

Previously, the American government had threatened Japan with a new 25% tariff on its goods, which was later lowered to 15% when the two countries reached a trade agreement.

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

On an annualized basis, Japan's GDP shrank by 1.8% in the three months through September.

"The Japanese economic situation was strong in the first half of this year and the latest GDP figures showed that momentum is paused temporarily.

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

The US administration has recently recognized the impact of tariffs on Americans, lowering tariffs on food imports including beef, tomatoes, coffee and fruits amid increasing concerns about rising costs.

Business Calendar

• 8am GMT: Switzerland GDP report for Q3
• 3pm GMT: US construction spending data for August