Abe’s two-year premiership has largely focused on breathing life into an economy plagued by years of deflation, and getting a handle on Japan’s soaring national debt.
Raising sales taxes are key to tackling that debt, but a levy increase in April — Japan’s first in 17 years — knocked consumers off their feet, as Abe’s approval ratings suffer and he spends political capital trying to restart Japan’s nuclear reactors and bolstering the role of the military.
“It now looks likely that PM Abe will call off the hike and announce snap elections,” said Marcel Thieliant from Capital Economics.
Gross domestic product shrank 0.4 percent in the third quarter, or at an annualised rate of 1.6 percent, underscoring how the tax rise stalled Abe’s programme to turn around the long struggling economy.
The market’s median expectation was for a 0.5 percent expansion, according to economists surveyed by the leading Nikkei business daily.
Residential investment fell, as consumer and corporate spending remained tepid. Exports were in positive territory, but shipments of cars and televisions were not enough.
The dismal reading for the world’s number three economy may cloud the global outlook as Abe returns from a G20 meeting in Brisbane where leaders representing the bulk of the global economy pledged Sunday to try lift their collective growth by an extra 2.1 percent by 2018.
Tokyo’s Nikkei 225 stock index tumbled 2.96 percent by the close.
“The decision to put off another tax hike is likely to lift consumer spending to some degree…(and) capital spending is likely to improve, reflecting higher corporate profits thanks to a weaker yen,” said Harumi Taguchi, principal economist at IHS Global Insight.
“However, the economy will probably remain weak unless higher corporate profits can support wage increases, and this would raise the risk of another tax hike.”
Speculation has been swirling that Abe — who faces a leadership election next year — will delay increasing Japan’s sales tax to 10 percent, after the rise to 8.0 percent from 5.0 percent in April.
The economy suffered a revised 1.9 percent contraction in the April-June quarter — or 7.3 percent at an annualised rate — reversing a 1.6 percent expansion in the first quarter when hopes for Abe’s growth plan, dubbed “Abenomics”, were still buoyant.
The economy was last in recession when Abe swept to power in late 2012.
“Any further tax increases are out of the question. It’s impossible,” Etsuro Honda, a close adviser to Abe and one of the growth policy’s main architects, told the Wall Street Journal, adding that Tokyo should launch a 3.0 trillion yen economic stimulus package
Last month, the Bank of Japan expanded its already huge monetary easing programme, but the latest figures will lead to talk of further central bank measures to counter the downturn.
Still, economy minister Akira Amari noted that Japan’s economy expanded 0.5 percent in the first nine months of the year.
“We can’t just simply summarise (the data) with the word ‘recession’,” he said.
But Yukio Edano, secretary-general of the opposition Democratic Party of Japan, told reporters: “The economic policy may have worked to push up share prices, but this shows the limits of Abenomics.”
Tokyo’s tax rises are aimed at paying down the country’s enormous national debt, but they have put Abe in a tricky position as he tries to balance them with his pro-spending growth plan.
A fall in consumer spending was expected — millions of shoppers dashed to stores ahead of the tax hike — but the second-quarter contraction was much more painful than many economists had expected.
Japanese media have reported that Abe plans to hold a general election on December 14, two years ahead of schedule, to bolster his support on the back of shaky approval ratings, and while opposition parties remain weak.
An election win next month would boost Abe before the Liberal Democratic Party’s three-yearly leadership vote in 2015.
The Mainichi newspaper said the conservative premier would order the drafting of an additional budget on Tuesday, before announcing his decision to dissolve the lower house of parliament. (AFP)