• Reuters, Kyodo

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Japan's economy contracted much faster than expected in the third quarter as global supply disruptions hit exports and business spending plans and fresh COVID-19 cases soured the consumer mood.

While many analysts expect the world's third-largest economy to rebound in the current quarter as virus curbs ease, worsening global production bottlenecks pose increasing risks to export-reliant Japan.

"The contraction was far bigger than expected due to supply-chain constraints, which hit output and capital spending hard," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"We expect the economy to stage a rebound this quarter but the pace of recovery will be slow as consumption did not get off to a good start even after COVID-19 curbs were eased late in September."

The economy shrank an annualized 3.0% in July-September after a revised 1.5% gain in the first quarter, preliminary gross domestic product (GDP) data showed, compared with a median market forecast for a 0.8% contraction. It was the the first decrease in two quarters.

The weak GDP contrasts with that of other advanced nations such as the United States, which saw its economy expand 2.0% in the third quarter on strong pent-up demand.

On a quarter-on-quarter basis, Japan's GDP fell 0.8% compared with market forecasts for a 0.2% decline, the data showed.

Some analysts said Japan's heavy dependency on the auto industry meant the economy was more vulnerable to trade disruptions than other countries.

Shinichiro Kobayashi, principal economist at Mitsubishi UFJ Research and Consulting, said automakers make up a large part of Japan's manufacturing sector with a wide range of subcontractors directly affected.

Prime Minister Fumio Kishida plans to compile a large-scale economic stimulus package worth "several tens of trillion yen" on Friday, but some economists were skeptical about its impact on near-term growth.

"The package will likely be a mixed bag of near-term and long-term growth measures, and the focus may be blurred, so it won't have much impact near-term," Norinchukin's Minami said.

Private consumption, which makes up more than half of the economy, fell 1.1%, versus a 0.5% decline expected by economists and after a 0.9% gain in April-June period, the data showed.

Consumer spending fell for the first time in two quarters, as expenditures on services including trips and dining out remained sluggish under the government's months-long virus emergency, which was fully lifted nationwide on Oct. 1.

With the aim of curbing a coronavirus resurgence driven by the highly contagious delta variant, the emergency targeted 21 out of Japan's 47 prefectures at one point, requesting people to stay home and restaurants and bars to close early and to stop serving alcohol.

Household spending on vehicles was weak as automakers were forced to cut output due to limited chip and parts supplies since around the summer amid a worldwide semiconductor shortage and parts supply disruption resulting from virus infection surges in Southeast Asian nations.

The reduced auto production also led business investment and exports to decrease 3.8% and 2.1%, respectively.

Analysts polled by Reuters expect Japan's economy to expand an annualized 5.1% in the current quarter, as consumer activity and auto output pick up.

However, Japanese firms still face risks from higher commodity costs and supply bottlenecks, which threaten to undermine the economic outlook over the short- to mid-term.

Real GDP, which factors in the effects of inflation, won't return to pre-pandemic levels until the second half of 2023, said Takahide Kiuchi, a former Bank of Japan board member who now serves as chief economist at Nomura Research Institute.

"China's slowdown, supply constraints, rising energy prices and a slowdown in inflation-hit western countries will reduce the pace of growth towards mid-2022," Kiuchi said.

"As exports remain severe, Japan's economy will likely undergo moderate growth of around 1%-2% annualized in the second quarter onward, even taking effects of stimulus into account."

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