Tokyo - Japan's economy shrank at an annualized rate of 0.4 per cent in real terms in the July-September period, the government said Monday.

The gross domestic product (GDP) fell 0.1 per cent during the three months from the previous quarter, marking the second quarterly drop, the Cabinet Office said.

Looking at the GDP for the July-September quarter, Japanese Economic and Fiscal Policy Minister Kaoru Yosano said Monday that the nation's economy is in a recession, which means that it shrank two quarters in a row.

"As the global economy is expected to slow down for the time being, downward movement (in Japan) is expected to continue," Yosano added.

He expressed concerns over a possible squeeze on the Japanese economy if the financial crisis escalates in the United States and Europe and stock and currency markets continue to fluctuate.

The government's report showed that corporate capital spending fell a real 1.7 per cent in the July-September quarter compared to the previous quarter, marking the third consecutive quarterly drop.

Exports inched up 0.7 per cent, compared to a 2.6-per-cent drop in the previous quarter. But the growth was limited due to slow demand of cars and high-tech devices abroad.

Imports were also up 1.9 per cent due to rising prices of crude oil and commodity.

Consumer spending, which accounts for more than half of Japan's GDP, rose 0.3 per cent due to rising food and oil prices. But experts say that the consumption may enter negative territory in the next quarter through January-March.

Economist Takahide Kiuchi of Nomura Securities Co expected that the nation's economy would escape recession in the last six months of 2010 after the US economy recovers and Japan's exports increase.

GDP is the total value of goods and service produced domestically. Real GDP figures are adjusted for price and seasonal variations. (dpa)