Japan's economy shrank in the September quarter for the first time since last year, adding to signs that slowing global growth and tensions with China are nudging the world's third-largest economy into recession.

The 0.9 percent fall in GDP was in line with expectations, although a decline in capital expenditure was much steeper than forecast. Sony Corp <6758.T> and Panasonic Corp <6752.T> have slashed spending plans to cope with massive losses as they struggle with competitive markets and a strong yen.

The fall in GDP translated into an annualized rate of decline of 3.5 percent, government data showed on Monday. While U.S. growth showed a modest pick up in the third quarter, Japan and the euro zone economies are shrinking.

"The GDP data confirms that the economy has fallen into a recession," said Tatsushi Shikano, senior economist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. "It is set for a second straight quarter of contraction in the current quarter."

A recession is commonly defined as two consecutive quarters of contraction.

The data will keep the Bank of Japan under pressure to boost monetary stimulus even after it eased policy in October for the second straight month as a strong yen and a territorial row with China add to the impact on exports of the global slowdown.

Many analysts expect the BOJ to leave policy unchanged at a review next week, but some see it boosting stimulus again at a December 19-20 meeting, shortly after the U.S. Federal Reserve is due to meet.

External demand accounted for 0.7 percentage points of July-September GDP contraction, matching the median projection. Japan's exports fell 5.0 percent in July-September, the biggest decline since a 6.0 percent decline in April-June last year, the data showed.

A row with China over sovereignty of some islands in the East China Sea sparked violent protests in China and the boycott of Japanese goods, which added to the slide in exports, particularly for automakers such as Nissan Motor Co <7201.T>.

Private consumption - which accounts for roughly 60 percent of the economy - fell 0.5 percent in the third quarter against a median forecast of a 0.6 percent drop.

Capital expenditure tumbled 3.2 percent, the fastest pace of decline since a 5.5 percent drop in April-June 2009, as companies turned more pessimistic about earnings from domestic and overseas markets.

Japan's ailing electronics sector is one good example of the extent to which companies are cutting back on investment.

Sony plans to reduce capital spending by 29 percent in the year to March 2013 and Panasonic plans a 27 percent cut, after incurring huge losses in their TV manufacturing businesses.

The companies are struggling to compete with more nimble rivals, such as South Korea Samsung Electronics <005930.KS> and America's Apple Inc , and a steady rise in the yen, which makes exports from Japan more expensive.

Japan's economy outperformed most of its Group of Seven peers in the first half of this year on robust private consumption and spending for reconstruction from last year's earthquake.

But growth has stalled since then. Indeed, second-quarter growth was revised down by half to just 0.1 percent compared with an initial report. The last quarterly contraction was in the Oct-Dec period of 2011, when GDP fell 0.3 percent.

With the economic affect of rebuilding from last year's earthquake and tsunami fading, the government acknowledged last week that its index of leading indicators gauge fell to a level suggesting the onset of a recession.

"Judging from the coincident indicator index, the economy peaked in March and it is likely to bottom out in October or November, as the global economy is expected to pick up gradually," Mitsubishi UFJ Morgan Stanley's Shikano said.

The BOJ set a 1 percent inflation target and eased policy in February. It followed up with further stimulus in April, September and October on mounting evidence that the economy was on the cusp of recession.

The euro zone is expected to report on Thursday that the economy contracted by 0.2 percent in the third quarter, adding to a 0.2 percent contraction in the second quarter.

(Editing by Neil Fullick and Tomasz Janowski)