By Tetsushi Kajimoto

TOKYO Japan's economy contracted in July-September, snapping two straight quarters of expansion, squeezed by weakening demand and complicating policymakers' efforts to revive faltering growth.

Gross domestic product (GDP) in the world's third-largest economy contracted 2.1% in the third quarter, a much larger decline that economists' median forecasts for an annualised 0.6% fall.

It followed an annualised expansion of 4.5% in the previous quarter.

The weak reading reflects lacklustre consumption and capital expenditure, dashing policymakers' hopes for a post-pandemic rebound in domestic activity to offset weaker external demand from China and elsewhere.

Consumption fell slightly in July-September compared with economists' median estimate for 0.2% growth in July-September from the previous quarter after falling 0.9% in April-June.

Capital expenditure fell 0.6% in the third quarter, versus a 0.3% gain seen by economists, after declining 1.0% in April-June.

External demand shaved 0.1 of a percentage point off GDP in July-September, in line with expectations.

(This story has been corrected to fix the milestone to say two straight quarters of expansion, not three, in paragraph 1)

(Reporting by Tetsushi Kajimoto; Editing by Sam Holmes)