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The Japanese economic system has shown a contraction for the first time in a year and a half, primarily driven by declining overseas shipments because of recent American tariffs.

G7 Economic Rankings

Japan stands as the initial Group of Seven country to report an output shrinkage in the latest three-month period.

With the United States still needing to publish its gross domestic product data for the third quarter, the current Group of Seven growth leaderboard display:

• France: +0.5% quarterly growth
• UK: 0.1 percent
• Canada: 0.1 percent (provisional estimate)
• Germany: zero growth
• Italian economy: 0%
• Japanese economy: -0.4%

Travel Shares Decline during Political Rift with China

In addition to the economic contraction, Japan is dealing with an growing political dispute with China concerning Taiwan.

Shares in Japan's travel and retail companies have dropped noticeably after China recommended its nationals to avoid traveling to Japan.

This action by Chinese authorities escalated a political dispute that was triggered by comments from Tokyo's new PM about the potential of sending forces in the case of a potential Chinese invasion on Taiwan.

The development led to a surge of selling across Japan's leisure shares.

• The Tokyo Disneyland operator stock fell by 5.7%
• Isetan Mitsukoshi tumbled by 11.3%
• Japan Airlines fell by 3.75 percent

"The ongoing dispute over Taiwan and China's travel warning discouraging visits to Japan brings short-term challenges for retail and hospitality sectors.

"Chinese visitors represent roughly 25% of Japan's inbound traffic, making retail outlets, luxury retail, and tourism services particularly at risk."

Economic Contraction Breakdown

Japanese GDP fell by 0.4% in the July-September quarter, as industrial exports were hit by duties levied by the US this year.

Exports were a major factor of the decline, dropping by 1.2 percent compared with the previous quarter, and were 4.5% lower than a year ago.

Earlier this year, the American government had proposed Japan with a new 25% tariff on its products, which was later reduced to 15 percent when the two countries concluded a trade agreement.

Private demand also fell, by 0.3% quarter-on-quarter.

On an annual basis, Japan's GDP shrank by 1.8% in the quarter through September.

"The Japanese economic situation was solid in the first half of this year and today's GDP figures showed that growth is halted for now.

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

The White House has recently recognized the effect of tariffs on Americans, lowering tariffs on imported food products including meat, produce, coffee and fruits amid growing concerns about rising costs.

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