Japan’s economy unexpectedly shrank for the first time in a year in the third quarter, stoking further uncertainty about the outlook as global recession risks, a weak yen and higher import costs took a toll on household consumption and businesses.

The world’s third-biggest economy has struggled to motor on despite the recent lifting of COVID curbs, and has faced intensifying pressure from red-hot global inflation, sweeping interest rate increases worldwide and the Ukraine war.

Gross domestic product fell an annualised 1.2 per cent in July-September, official data showed, compared with economists’ median estimate for a 1.1 per cent expansion and a revised 4.6 per cent rise in the second quarter.

It translated into a quarterly decline of 0.3 per cent, versus a forecast of 0.3 per cent growth.

Japan has also been dealing with the challenge of the yen’s slide to 32-year lows against the dollar, which has magnified cost-of-living strains by further lifting the price of everything from fuel to food items.

“The contraction was a surprise,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

The lifting of COVID restrictions offered some relief, Minami said, but “the outlook was clouded by uncertainty” over fresh virus cases.

“While the rise of inbound tourists is a bright spot for October-December and beyond, we see downside risks from the rising price of goods and the fear of another outbreak,” he said.”

Highlighting concern about a resurgence of the pandemic, Japan will face new daily COVID-19 infections topping 100,000 on Tuesday for first time in two months, Fuji Television reported. Cases have been on the rise in recent weeks in what some authorities have called the eighth wave in the course of the pandemic.

In a sign of asset outflows driven by the weak yen, Japan logged trading losses for a sixth straight quarter in the July-September period, amounting to real losses worth a record 19.7 trillion yen, the GDP data showed.

The risks to Japan’s outlook have risen as the global economy teeters on the brink of recession.

Economy Minister Shigeyuki Goto said a global recession could hit households and businesses.

In the third quarter, private consumption, which makes up more than half of the Japanese economy, grew 0.3 per cent, a touch above the consensus estimate for 0.2 per cent growth but slowing sharply from the second quarter’s 1.2 per cent gain. The data suggested consumer spending will remain pressured over the coming months, with real compensation of employees falling 1.6 per cent in the third quarter, posting a second straight quarter of declines and extending from previous quarter’s 1.2 per cent decline.

“Growth should turn positive in Q4, amid a rebound in inbound tourism and a smaller trade deficit, but the eighth virus wave and rising inflation will limit the recovery,” said Darren Tay, Japan Economist at Capital Economics.

Tay noted that non-residential investment increased by 1.5 per cent quarter-on-quarter, below consensus of a 2.1 per cent rise and Capital Economics’ own estimate for a strong 3.0 per cent growth rate.