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Japan slips into surprise recession, paves way for tax delay, snap poll

Monday, November 17, 2014, 08:38 GMT+7

Japan's economy unexpectedly slipped into recession in the third quarter, setting the stage for Prime Minister Shinzo Abe to delay an unpopular sales tax hike and call a snap election just two years after he took office.

Gross domestic product fell at an annualized 1.6 percent pace in the July-September period, after it plunged 7.3 percent in the second quarter following a rise in the national sales tax.

The economy had been forecast to rebound by 2.1 percent in the third quarter.

Abe had 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, the worst among advanced nations.

"It's much weaker than we expected, said Kenichiro Yoshida, senior economist at Mizuho Research Institute. "The growth of consumption is very weak; that's one reason that the government may decide to delay the sales tax."

Japanese media have said the prime minister, who returns from a week-long tour to China, Myanmar and Australia on Monday, could announce his decision to delay the hike as early as Tuesday and state his intention to call a poll, which ruling party lawmakers expect to be held on Dec. 14.

Etsuro Honda, an economic adviser to Abe who opposes the tax rise, has said that if growth was under 3.8 percent, raising the tax rate would be "out of the question".

The yen slipped on the surprise result, with the dollar briefly pushing to a seven-year high above 117 yen, and Tokyo stocks opened modestly weaker.

Sluggish economic growth and downward pressure on prices due to declining global oil prices prompted the Bank of Japan to expand its massive monetary stimulus last month.

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 a controversial shift away from Japan's post-war pacifism.

"This will not be an election about the sales tax but to seek support for a push forward with 'Abenomics'," said a Japanese government official, adding the final decision was up to Abe.

Abe's Liberal Democratic Party (LDP) looks virtually certain to keep its majority in the lower house, since the opposition is divided and weak, but it could well lose seats.

Abe inherited the sales tax plan when he took power in December 2012, pledging to revive the economy with his "Abenomics" mix of ultra-easy monetary policy, spending and reforms.

The LDP, its smaller ally and the then-ruling Democratic Party enacted the legislation requiring the tax to be raised unless economic conditions were judged too weak.

On a quarter-on-quarter basis, the economy shrank 0.4 percent in the third quarter, following a contraction of 1.8 percent in the second quarter. Recessions are typically defined as two or more consecutive quarters of economic contraction.

Private consumption, which accounts for about 60 percent of the economy, rose 0.4 percent from the previous quarter, half as much as expected, in a sign that the April tax increase to 8 percent from 5 percent had a stronger and more lingering impact on spending than initially expected.


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