Japan may face election after slide into recession

In a stark snapshot of Japan's stagnating economy, a businessman sits at an unusually quiet Tokyo docks. Picture: Reuters
In a stark snapshot of Japan's stagnating economy, a businessman sits at an unusually quiet Tokyo docks. Picture: Reuters
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JAPAN’S economy has unexpectedly slipped back into recession, after housing and business investment dropped following a sales tax hike, hobbling its ability to help drive the global recovery.

The world’s third-largest economy contracted at a 1.6 per cent annual pace in the third quarter, the government said yesterday, confounding expectations it would rebound after a big drop the quarter before.

The news cast a pall over financial markets. Japan’s share benchmark fell 3 per cent, and many others in Asia also declined. Shares were lower in early trading in Europe, and in the US, Dow Jones and S&P futures were off 0.5 per cent, suggesting a dismal start for the week on Wall Street.

An economy is generally considered to be in recession when it shrinks for two consecutive quarters.

“GDP for July-September wasn’t good, unfortunately,” prime minister Shinzo Abe told a gathering in Tokyo shortly after his return to Japan from the G20 summit in Brisbane, Australia.

The downturn deepens global uncertainty as growth slows in China and remains stubbornly flat in the 18-country eurozone.

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Japan’s weakness could hinder growth elsewhere if its companies cut investment and buy fewer imports such as machinery, electronics and raw materials. Though small, Japan is one of the world’s biggest importers of food and the third-biggest buyer of natural gas.

Japan’s GDP data showed across-the-board weakness in demand among consumers and manufacturers, who had stepped up purchases before the sales tax was raised in April to 8 per cent from 5 per cent.

“The impact of the sales tax was much more severe than expected,” Junko Nishioka, an economist at RBS Japan Securities, said. Housing investment plunged 24 per cent from the same quarter a year ago, while corporate capital investment sank 0.9 per cent. Consumer spending, which accounts for about two-thirds of the economy, edged up just 0.4 per cent.

Given the contraction, Mr Abe is expected to announce today he will delay a second sales tax hike – to 10 per cent – planned for next October. That would relieve the pressure on the economy, but slow progress on efforts to rein in Japan’s government debt, the largest among industrialised nations.

Mr Abe is likely to use the decision to delay the tax hike as a reason to call a snap election next month to secure a public mandate for delaying progress on fixing Japan’s finances. That choice may be puzzling to some, but the ruling Liberal Democrats have a solid majority and hope to consolidate their power further at a time when opposition parties are viewed as weak and in disarray.

Japan emerged from its last recession just as Mr Abe took office in December 2012, saying he would end two decades of stagnation with a combination of lax monetary policy, strong fiscal spending and “drastic” economic reforms – a strategy dubbed “Abenomics”.

But consumer spending is faltering as the population shrinks and grows older. Japanese manufacturers have lost their leading edge in innovation while shifting production to cheaper locations offshore.

Household incomes peaked more than a decade ago, and a growing share of workers are having difficulty making ends meet with part-time, contract work. Wage rises – mostly limited to a small share of workers in big-name companies – have lagged behind inflation.

Most economists had forecast that Japan would expand at about a 2 per cent pace after a sharp 7.1 per cent annual drop in April-June immediately following the tax hike. Compared with the previous quarter, GDP declined 0.4 per cent.

Delaying the next tax hike could undermine confidence in Japan’s ability to repair its battered finances, but the risk to the recovery is too great, according to economist Koichi Hamada, who likened April’s tax increase to excess payload on the “rocket of Abenomics”.

Mr Hamada, an Abe adviser, had publicly urged the prime minister to raise the sales tax in smaller stages.

“Tax rate increases are not meaningful if they don’t increase tax revenues,” he said.

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