Japan falls into recession; PM Abe to delay sales tax hike, call snap election
Japan has unexpectedly sunk into recession in the third quarter, raising the prospect of a snap election as the country’s prime minister, Shinzo Abe, attempts to secure a mandate to breathe life into the world’s third biggest economy.
The country’s output shrank 0.4% from July to September according to figures released on Monday, which the cabinet office said showed the economy was shrinking at an annual rate of 1.6% – far worse than economists’ forecasts for annualised growth of about 2%.
Japan’s descent into recession for the third time since the financial crisis comes a day after David Cameron warned fellow G20 leaders about the fragility of the world economy. China has reported a decline in GDP that has dented growth in the region and among major exporters including Germany, Russia and Brazil. The gathering conflict in Ukraine has also spooked markets.
Abe is widely expected to postpone a planned increase in sales tax from 8% to 10% next October after the GDP figures showed that a rise in the VAT-equivalent in April this year – the first for 17 years – had severely dented consumer spending. An even bigger slump in the previous quarter was blamed on the April sales tax rise, from 5% to 8%.
An economy is deemed to be in recession if it suffers two straight quarterly contractions.
Abe now faces a difficult decision: whether to address Japan’s huge public debt, now more than twice the size of its economy, by pushing ahead with what would be a deeply unpopular tax increase, or hold off and attempt to kickstart growth.
All indications are that he will opt for a delay in the tax rise and call a snap election on Tuesday. Voters would probably go to the polls in mid-December, halfway through his current term.
“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,” said Marcel Thieliant at Capital Economics.
