TOKYO: Japan's economy unexpectedly contracted for the first time in a year in the third quarter, raising concerns about the outlook as global recession fears, a weak yen, and increased import costs weighed on consumer spending and industry.

Despite the recent easing of COVID restrictions, the world's third-largest economy has failed to keep up with red-hot global inflation, sweeping interest rate rises abroad, and the Ukraine crisis.

Official figures show that GDP declined 1.2% year on year in July-September, compared to experts' consensus expectations of 1.1% growth and a revised 4.6% gain in the second quarter.

It equated to a 0.3% quarterly drop versus a 0.3% increase projection.

In addition to being squeezed by a global downturn and increasing inflation, Japan has faced the problem of the yen's fall to 32-year lows versus the dollar, which has exacerbated cost-of-living stresses by raising the price of everything from gasoline to groceries.

"The decline caught us off guard," Takeshi Minami, head economist of Norinchukin Research Institute, said.

The lifting of COVID restrictions offered some relief, but "the outlook was clouded by uncertainty" over fresh virus cases. The contraction was a surprise, said Takeshi Minami, chief economist at Norinchukin Research Institute. The rise of inbound tourists is a bright spot for October-December and beyond, he said.

The government has warned that a global recession could hit households and businesses.

Real compensation of employees fell 1.6%, posting a second straight quarter of declines, and extending from the previous quarter's 1.2% 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.

Exports increased by 1.9% but were swamped by large increases in imports, resulting in a 0.7 percentage point drop in GDP from external demand.

With 29 trillion yen ($206.45 billion) in additional expenditure in the budget, Prime Minister Fumio Kishida's administration is increasing support for households in an effort to mitigate the consequences of cost-push inflation. The Bank of Japan has also kept its ultra-easy monetary stimulus policy in place to assist the economy in recovery.

Tay of Capital Economics forecasts a difficult 2023 for Japan.

"As for 2023, a worldwide slowdown will push Japan into a moderate recession in H1 of 2023, weighing on exports and company investment."