The country’s economy saw a sharp contraction in the third quarter

The Japanese economy slipped into a contraction in the period from July to September, ending two straight quarters of growth, according to government data released on Wednesday.

Gross domestic product (GDP) in the world’s third-largest economy contracted 2.1% in the third quarter in a much sharper decline than a median market projection for an annualized 0.6% drop. The slump followed an expansion of 4.5% in the second quarter.

“Given the absence of a growth engine, it wouldn’t surprise me if the Japanese economy contracted again in the current quarter. The risk of Japan falling into recession cannot be ruled out,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“The weak growth and the specter of slowing inflation could delay the Bank of Japan’s exit from negative interest rates,” he added.

The slowdown has been attributed to stubbornly high inflation that is squeezing household consumption and weak external demand from China and elsewhere, adding pressure on Japanese manufacturers.

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Consumption was unchanged between July and September after sliding 0.9% in the previous quarter, falling short of economists’ median estimate for 0.2% growth, data showed.

“The disappointing third-quarter reading serves as a sobering reminder that the country is not yet out of the woods,” said Stefan Angrick, senior economist at Moody’s Analytics.

Inflation-adjusted real wages, an indicator of consumer purchasing power, dropped by 2.4% in September year-on-year, marking the 18th straight month of declines.

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