Japan's economy contracted 0.8 per cent in the third quarter, marking the second recession since Prime Minister Shinzo Abe took office in December 2012.

The deeper-than-expected downturn followed a 0.7 per cent contraction in Japan's GDP in the second quarter.

Abe has been pushing Japanese companies, who are sitting on cash, to reinvest and stimulate the economy. Instead, business investment fell 1.3 per cent in the quarter and companies drew down their inventories to meet demand.

China's slowdown is affecting the Japanese economy, with less demand for industrial equipment and construction machinery as the world's largest economy slows its pace of growth.

Japan has been plagued with slow growth for years, as its aging population withdraws from the workforce and puts a burden on government services.

Promised more growth

Abe came into office promising a new, more robust economy and has conducted a policy of aggressive stimulus by the central bank, which makes its next interest rate decision later this week.

Under Abe, the stock index rose and the yen exchange rate fell, providing a windfall for multinational companies who earn their revenue worldwide.

He's also curbed persistent consumer-price deflation. Consumer spending has recovered from a sales tax hike last year and was up 0.5 per cent in the quarter.

But wages are stagnant, a problem for the Bank of Japan, which is looking for inflation to rise to two per cent before it stops its stimulus program.

While the new data will embolden Abe's critics, economics minister Akira Amari argued Japan's economy had broadly improved fundamentals underneath the current dip.

"Weakness is apparent in some areas, but corporate profits are at record highs and the employment and wage environment is improving," he said in a statement. "The gentle recovery in the economy is continuing."