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TOKYO: Japan's economy shrank slightly faster than initially reported in the third quarter, as a sharp rise in local COVID-19 cases hit private consumption and a global chip supply shortage hurt corporate sentiment.

The deeper contraction is a setback for policymakers hoping easing supply shortages and loosened pandemic curbs would support a recovery in the world's third-largest economy this quarter.

Japan's economy declined an annualised 3.6% in July-September, revised Cabinet Office data showed Wednesday, worse than the preliminary reading of a 3.0% contraction.

The data, which was worse than economists' median forecast for a 3.1% drop, equals a real quarter-on-quarter contraction of 0.9% from the prior quarter, versus a preliminary 0.8% drop.

"This confirms that economic conditions were stagnating in the July-September quarter," said Atsushi Takeda, chief economist at Itochu Economic Research Institute.

"Growth turned negative due to the resurgence of the coronavirus."

The faster decline was mainly due to a larger fall in private consumption, which makes up more than half of gross domestic product, and shrank 1.3% from the previous three months, worse than the initial estimate of a 1.1% drop.

Consumption fell as bad weather kept shoppers at home and a global chip shortage hit sales of cars and electronics due to production snags, a government official said.

"A large contraction in durable goods (spending) indicated that car production cuts had a huge impact," said Wakaba Kobayashi, an economist at Daiwa Institute of Research.

Durable goods spending posted its biggest drop since 1994 when comparable data first became available, the official said, slumping 16.3% quarter-on-quarter and pulling down household consumption by 0.7 percentage points.

The data showed public investment dropped 2.0% versus the initial estimate of a 1.5% decline, while capital spending saw a smaller fall, shrinking 2.3% from the prior quarter, compared with a 3.8% preliminary drop.

The net contribution of exports to the GDP change was zero, offset by imports. Meanwhile, domestic demand pulled GDP down by 0.9 percentage point, matching a preliminary contribution.

The GDP downgrade, which took into account a change in the way seasonal adjustments were calculated, comes after data on Tuesday showed household spending fell for a third straight month in October.

However, in a more recent sign that consumption has picked up, a sentiment index of "economy watchers", or workers close to consumer and retail trends, rose in November to an eight-year high.

Since the start of the pandemic, Japan's government has sought to support the fragile economy by large-scale fiscal spending. It unveiled a record $490 billion package last month.

Analysts are hopeful spending will pick up due in part due to that spending package, with Daiwa's Kobayashi seeing positive impact from the first quarter of next year.

"We expect the stimulus package to boost Japan's GDP by around 2%, by pushing up private consumption, government spending and public investments," she said.

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