Japan has reported that its economy contracted at a real annual rate of 1.6 percent in July-September, in a second straight quarterly decline that has returned the country to recession and prompted predictions of a snap elections.
The release of the preliminary quarterly economic data on Monday was received with far more attention than usual since Prime Minister Shinzo Abe is expected to make the dismal GDP reading the basis for calling a general election.
Most economists had forecast the world’s third-biggest economy expanded at about a 2 percent pace. The negative growth figure was much lower than expected and makes it very likely Abe will delay implementation of a sales tax hike planned for October, 2015.
A recession is generally regarded as two straight quarters of economic contraction, and Japan’s economy shrank 7.1 percent in the April-June quarter.
“In light of the sharp fall in today’s preliminary estimate, it now looks likely that Abe will call off the hike and announce snap elections,” economist Marcel Thieliant of Capital Economics said in a commentary.
Abe wants a renewed mandate for his “Abenomics” policies aimed at revitalising the economy through lavish injections of cash into the economy by the central bank, strong public spending and reforms intended to improve the country’s waning economic competitiveness.
Tax increases are crucial for getting Japan’s battered government finances into better shape, and putting off the hike slated for next year carries some risk that financial markets may doubt Japan’s resolve to restore its ailing public finances.
After many years of deficit spending the total public debt is more than twice the size of the economy and the largest among developed nations.
But Abe and his advisers appear to view the threat to Japan’s recovery, which has limped along since the April 1 increase in the sales tax to eight percent from five percent, as the more urgent risk.
Japan emerged from its last recession in late 2012, just as Abe took office pledging to restore the country’s economic vigor.