"I think they are severe numbers ... we will respond with a sense of crisis," said Prime Minister Yoshihiko Noda at a session in Parliament, Kyodo reported.
The Los Angeles Times reported that a dispute over sovereignty of a group of uninhabited islands in the East China Sea provoked a boycott of Japanese goods in China. Consequently, sales of Japanese cars in China plummeted, the newspaper said.
A major portion of Japan's economy, consumer spending, dropped 0.5 percent quarter to quarter. Capital expenditures by large corporations declined sharply, falling 3.2 percent, as companies are spending less with consumer spending slow.
"The Japanese economy enjoyed a modest recovery (January through June) thanks to strong private consumption and government reconstruction spending," HSBC economist Izumi Davalier wrote in a research note.
"But now that these temporary factors have faded and with exports declining at a faster-than-expected pace, GDP has started to contract in substantial terms again," the economist said.
"We expect this to repeat in the last quarter of 2012, before economic activity starts to pick up again early next year," he wrote.
Although not an official definition, for many two consecutive quarters of GDP contraction indicates a recession.
Analysts also said there were risks the economy could contract even faster, as much of the downturn is now linked to the European market, which is close to an official recession, and China, where business hinges on political events associated with the islands in dispute.