Japan’s economy unexpectedly slips into recession

November 17, 2014
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The Bank of Japan headquarters in Tokyo/AFP
The Bank of Japan headquarters in Tokyo/AFP

, Japan’s economy unexpectedly slipped into recession in the third quarter, falling at an annualised 1.6 percent rate after plunging 7.3 percent in the second quarter following a rise in the national sales tax that undercut consumer spending.

The world’s third-largest economy, after the United States and China, had been forecast to rebound by 2.1 percent in the third quarter but consumption and exports remained weak, saddling companies with huge inventories.

The news sets the stage for Prime Minister Shinzo Abe to delay another deeply unpopular sales tax hike and call a snap election halfway through his term.

Abe has said he would look at the data when deciding whether to press ahead with a second increase in the sales tax to 10 percent in October next year as part of a plan to curb Japan’s huge public debt, which is the worst among the industrialised nations.

Japanese media have said the prime minister, who returns from an Asia tour on Monday, could announce his decision to delay the hike as early as Tuesday and state his intention to call an election for parliament’s lower house, which ruling party lawmakers expect to be held on December14.

An economic adviser to Abe termed the economic slide “shocking” and urged the government to reconsider steps to support the economy.

“This is absolutely not a situation in which we should be debating an increase in the consumption tax,” Etsuro Honda, a University of Shizuoka professor and a prominent outside architect of Abe’s reflationary policies, told Reuters.

No election for parliament’s powerful lower house need be held until late 2016, but political insiders say Abe wants to lock in his mandate while his ratings are still relatively robust, helping him push ahead with economic and other policies such as a controversial shift away from Japan’s post-war pacifism.

Facing a divided and weak opposition, Abe’s Liberal Democratic Party (LDP) is expected to keep its majority in the lower house, but it could well lose seats. As election talk heated up last week, a poll by NHK public TV found that Abe’s voter support had fallen 8 percentage points to 44 percent from a month earlier.

A senior LDP lawmaker said the data made Abe’s decision to postpone the tax hike certain and that he expected the premier to call a snap poll, arguing that his “Abenomics” strategy to re-energise the economy was working but needed more time.

“For sure, minus 1.6 percent is not good, but if you look at individual indicators, things are beginning to turn up,” the lawmaker told Reuters.

“The prime minister feels strongly that he wants to make certain of the economic trend so I think he will put off the sales tax rise from next October,” he said.

Even before the GDP announcement, Abe appeared to suggest he was leaning towards delaying the tax hike, telling reporters travelling with him in Australia that raising the tax rate would be meaningless if deflation returned.

Consumption stagnaJapan’s economy unexpectedly slipped into recession in the third quarter, falling at an annualised 1.6 percent rate after plunging 7.3 percent in the second quarter following a rise in the national sales tax that undercut consumer spending.

The world’s third-largest economy, after the United States and China, had been forecast to rebound by 2.1 percent in the third quarter but consumption and exports remained weak, saddling companies with huge inventories.

The news sets the stage for Prime Minister Shinzo Abe to delay another deeply unpopular sales tax hike and call a snap election halfway through his term.

Abe has said he would look at the data when deciding whether to press ahead with a second increase in the sales tax to 10 percent in October next year as part of a plan to curb Japan’s huge public debt, which is the worst among the industrialised nations.

Japanese media have said the prime minister, who returns from an Asia tour on Monday, could announce his decision to delay the hike as early as Tuesday and state his intention to call an election for parliament’s lower house, which ruling party lawmakers expect to be held on December14.

An economic adviser to Abe termed the economic slide “shocking” and urged the government to reconsider steps to support the economy.

“This is absolutely not a situation in which we should be debating an increase in the consumption tax,” Etsuro Honda, a University of Shizuoka professor and a prominent outside architect of Abe’s reflationary policies, told Reuters.

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