Japan’s economy slips into recession in third quarter

17 Nov 2014


In an unexpected development, Japan's economy slipped into recession in the third quarter. The development could see prime minister Shinzo Abe defer an unpopular sales tax increase and call a snap election half-way through his term, Reuters reported.

Gross domestic product (GDP) retreated at an annualised 1.6 per cent pace in July-September, after it fell 7.3 per cent in the second quarter following an increase in the national sales tax, which hurt consumer spending.

Japan, the third-largest economy in the world had been projected to rebound by 2.1 per cent in the third quarter, however consumption, and exports remained weak, with companies ending up with huge inventories.

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 per cent in October next year, as part of a plan for cutting the country's huge public debt, the worst among advanced nations.

According to Japanese media, the prime minister, who returns from the G20 summit today, could announce his decision to delay the hike as early tomorrow and state his intention to call an election for parliament's lower house, which ruling party lawmakers expect to be held on 14 December.

The tax hike had been legislated by the earlier government in 2012 to cut Japan's huge public debt, which was the highest among developed nations, BBC reported.

The first phase of the increase was introduced in April. The 5 per cent to 8 per cent increase hit growth in the second quarter and still appears to be having an impact on the economy, according to commentators.

With the economy shrinking 0.4 per cent in the third quarter from the quarter previous, the data also revealed that growth in private consumption, which accounted for about 60 per cent of the economy, was much weaker than expected.

According to Glenn Levine, senior economist at Moody's Analytics, the Japanese economy was in recession and had now contracted in three of the last four quarters.

He added the most likely course was now a snap election in December in which voters would choose, naturally enough, to delay the tax increase.

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