Published On: Mon, Nov 17th, 2014

Japan’s Economy Dips Into Recession

Japan’s economy unexpectedly shrank for the second consecutive quarter, marking a technical recession in the world’s third largest economy.Gross domestic product (GDP) fell at annualised 1.6% from July to September, compared to forecasts of a 2.1% rise.

Japan's economy dips into recession

That followed a revised 7.3% contraction in the second quarter, which was the biggest fall since the March 2011 earthquake and tsunami.

Economists said the weak economic data would likely delay a sales tax rise.

Sales tax delay

Prime Minister Shinzo Abe is widely expected call a snap election to seek a mandate to delay an increase in the sales tax to 10%, scheduled for 2015.

The tax increase was legislated by the previous government in 2012 to curb Japan’s huge public debt, which is the highest among developed nations.

April saw the first phase of the sales tax increase, from 5% to 8%, which hit growth in the second quarter and still appears to be having an impact on the economy.

The economy shrank 0.4% in the third quarter from the previous one.

The data also showed that growth in private consumption, which accounts for about 60% of the economy, was much weaker than expected.

Recent economic indicators showing a sluggish economy had already put the next tax hike in question.

“The Japanese economy is in recession and has now contracted in three of the last four quarters,” said Glenn Levine, senior economist at Moody’s Analytics.

“The most likely course is now a snap election in December in which voters choose, naturally enough, to delay the tax increase.”

Election expected

Speculation had been growing that the Japanese prime minister would call an election next month to shore up support just two years after he took office.

Local media are now reporting that Mr Abe could announce an election as early as Tuesday to be held on 14 December.

The Japanese government’s chief spokesperson Yoshihide Suga said on Monday that Mr Abe was expected to decide on various steps to take amid the “severe economic situation”.

In reaction to the negative economic data, the dollar went above 117 Japanese yen before settling at 116.46.

The benchmark Nikkei 225, meanwhile, was trading lower 2.6% at 17,037.65 points.