Japan economy enters recession after surprise Q3 contraction

Japan's economy sank into recession in the third quarter, making it almost inevitable that Prime Minister Shinzo Abe will delay a fresh sales tax hike and call snap elections to reinvigorate his power against party rivals, analysts said Monday.

Abe's two-year premiership has been largely focused on breathing life into Japan's deflation-plagued economy, and getting a handle on its soaring national debt by tapping into new revenue through raising duties.

But a sales levy hike in April -- Japan's first in 17 years --- knocked consumers off their feet, as Abe's approval ratings fall and he uses up political capital in his attempt to restart nuclear power and bolster the role of Japan's military.

"In light of the sharp fall in today's preliminary estimate, it now looks likely that PM Abe will call off the hike and announce snap elections," Marcel Thieliant from Capital Economics said in a report following the data release.

Japan's gross domestic product shrank 0.4 percent in the third quarter, or at an annualised rate of 1.6 percent, underscoring how the tax rise earlier this year stalled Abe's programme to turn the world's number three economy around.

The market's median expectation was for a 0.5 percent expansion, according to economists surveyed by the leading Nikkei business daily.

Residential investment fell, capital spending was weak, and consumer spending remained tepid. Exports were in positive territory, but shipments of cars and televisions were not enough to drag the economy into the black.

"The data show that the economy is in a recession," said Koichi Fujishiro, an economist at Dai-ichi Life Research Institute.

"Household consumption is still weak as real disposable income declined...We'll have to wait until December or January to see a rebound in the economy."

Snap elections

The figures comes as speculation swirls that Abe -- who faces a leadership election next year -- will delay boosting Japan's sales tax to 10 percent next year, after the rise to 8.0 percent from 5.0 percent in April.

The economy suffered a revised 1.9 percent contraction in the April-June quarter -- or 7.3 percent at an annualised rate -- reversing a 1.6 percent expansion in the first quarter of the year when hopes were still buoyant for Abe's growth plan, dubbed "Abenomics".

Last month, the Bank of Japan expanded its already huge monetary easing programme to counter the downturn, but the latest figures will lead to talk of further measures by the central bank.

Tokyo has said it would wait to see the final estimate for third-quarter growth, due next month, before making a final decision on the second tax hike.

On Monday, economy minister Akira Amari noted that, despite Monday's data, the economy still expanded 0.5 percent in the first nine months of the year.

"A positive cycle in the economy is ongoing -- we can't just simply summarise (the data) with the word 'recession'."

Tokyo's tax rises are aimed at paying down the country's enormous national debt, but they have put Abe in a tricky position as he tries to balance them with his pro-spending growth plan, launched after he swept to power in late 2012.

While most commentators said a dip in spending was inevitable -- millions of shoppers dashed to stores ahead of the tax hike -- the second-quarter contraction was much more painful than many economists had expected.

Japanese media have reported that Abe plans to hold a general election on December 14, two years ahead of schedule, as he seeks to bolster his public support on the back of shaky approval ratings.

The premier wants an early poll while opposition parties remain weak after the ruling party's spectacular election victory two years ago, pundits said. An election win next month would boost Abe ahead of the Liberal Democratic Party's three-yearly leadership vote in 2015.

The Mainichi newspaper said the conservative premier would order the drafting of an additional budget on Tuesday, before announcing his decision to dissolve the lower house of parliament.