TOKYO — Japan's economy contracted in the latest quarter, signaling that it already may have joined Europe in recession, further weighing down world growth.
On an annualized basis, the world's No. 3 economy shrank 3.5 percent in the July-September quarter, the government reported Monday. That was in line with gloomy forecasts after Japan's territorial dispute with China hammered exports that already were weakened by feeble global demand.
The bad news will temper optimism over recoveries in China and the United States, where some economists are predicting growth will top 3 percent in the third quarter. China's painful slowdown likely bottomed out in the third quarter, with recent indicators such as factory production and auto and retail sales showing improvement. And Europe, though it may have turned a corner on its debt crisis as the financial system stabilizes, is forecast to get worse before it gets better.
Japan's outlook remains bleak, with most economists forecasting a further decline in economic activity for the October-December quarter, which officially would put it in a recession, according to the common definition of two consecutive quarters of contraction.
Consumer spending fell 0.5 percent in the third quarter as subsidies for auto purchases expired and corporate capital spending fell 3.2 percent. Spending on reconstruction from the country's March 2011 tsunami and nuclear disasters also has weakened.
The drop for the current October-December quarter may not be as severe as that experienced in July-September.
"If the economy does recover in any way it will be a minute rebound," said David Rea, an economist in London with Capital Economics. He said the contraction in gross domestic product in the last quarter of 2012 could be a couple of percentage points.
More than two decades after Japan's asset bubble burst in the early 1990s, its policymakers have yet to devise an effective strategy to help the economy break out of its deflationary funk. Meanwhile, the Japanese yen remains stubbornly high, discouraging its companies from investing at home and undermining its export competitiveness, especially against export-oriented rivals such as Germany and South Korea.
Strangled by weak consumer spending and public investment, the economy grew at an anemic 0.3 percent annual pace in April-June, according to figures that were revised down from the originally reported 1.4 percent.
The robust 5.2 percent pace of growth in the first quarter had raised hopes the recovery had taken hold, and until recently, the government was still forecasting growth at about 2 percent for the year. It had predicted a turnaround late in the year, but the renewed tensions with China over disputed islands in the East China Sea, coupled with sluggish growth in Europe and other key export markets, have doused hopes for a significant rebound before 2013.