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Feb. 16, 2020, 8:28 p.m. EST

Japan's economy shrinks faster than expected

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By Megumi Fujikawa

TOKYO -- Japan's economy shrank at a faster-than-expected annualized pace of 6.3% in the October-December quarter, the first contraction in more than a year, as a sales-tax increase at the beginning of the quarter cooled consumption.

Japan, the world's third-largest economy after the U.S. and China, could fall into a technical recession -- two straight quarters of contraction -- this quarter because of the effects of the novel coronavirus, economists said.

Economists polled by data provider Quick had expected a 3.9% annualized contraction in the October-December quarter. The actual figure, minus 6.3%, reflected weak private consumption, which dropped 2.9% on quarter. Consumers tightened their purse strings after the national sales tax rose to 10% on Oct. 1 from 8%.

It was the first time Japan's economy shrank since the July-September quarter in 2018. A warm winter also slowed private spending, economists said.

Capital expenditures declined because of concerns over trade tensions between the U.S. and China, which signed an initial trade deal in January.

While officials and economists expect the negative impact of the tax increase to ease in the January-March quarter, the outbreak of the novel coronavirus centered in China is likely to interfere with Japan's economic recovery. The virus, which causes a disease known as Covid-19, has hit Chinese tourism in Japan and disrupted some manufacturing in Japan that depends on Chinese parts.

"It is difficult to picture improvements in consumption during the January-March period, as Covid-19 caused travel restrictions and made people stay home as a precaution," said Daiwa Securities economist Mari Iwashita.

Chinese accounted for about 37% of the $44 billion in spending by tourists in Japan last year.

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com

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