Japan's economy unexpectedly shrank in the third quarter as housing and business investment declined following a sales tax hike, dragging the country into recession and further clouding the global economic outlook.
The world's third-largest economy contracted by 1.6 percent in the three months to September, the government said Monday, contrary to predictions it would grow after a big drop the previous quarter. The news is likely to deepen economic uncertainty across the world, coming at a time when China's growth is slowing and the 18-country eurozone showed only a 0.2 percent growth in the same quarter.
The latest gross domestic product (GDP) figure comes on the back of across-the-board weakness in demand among consumers, manufacturers and builders. Many individuals and companies had spent money before the country's sales tax was hiked in April from 5 percent to 8 percent, and spending has languished since then.
"The impact of the sales tax was much more severe than expected," said Junko Nishioka, an economist at RBS Japan Securities.
Housing investment plunged 24 percent from the same quarter a year ago, while corporate capital investment sank 0.9 percent. Consumer spending, which accounts for about two-thirds of the economy, edged up just 0.4 percent. The Nikkei stock average fell 3 percent.
Given the contraction, Prime Minister Shinzo Abe 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.
"GDP figures for July-September turned out not so encouraging," Abe said at a reception after returning from a week-long overseas tour. "We are seizing a chance to exit long-lasting deflation, and we cannot miss that chance," adding he wanted to analyze the situation and make a decision on the tax.
He also will likely make the dismal GDP reading the basis for calling a general election in mid-December to underpin the public mandate for his "Abenomics" policies of lax monetary policy, fiscal spending and structural economic reforms.
Japan emerged from its last recession just as Abe took office in December 2012, vowing to restore the nations' economic vigor after two decades of stagnation.
But the country is struggling to regain momentum as its population declines and ages. Apart from its automakers, many of its manufacturers have lost their leading edge in innovation while shifting production to cheaper locations offshore.
Household incomes, meanwhile, peaked more than a decade ago, and a growing share of workers are having difficulty making ends meet with part-time, contract work. Wage increases — 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 percent pace after its GDP plunged 7.3 percent in April-June period immediately following the tax hike. A recession commonly is regarded as two straight quarters of economic contraction. Compared to the previous quarter, GDP declined 0.4 percent.
An adviser to Abe termed the economic slide "shocking" and urged the government to take steps to support the economy.
"This is absolutely not a situation in which we should be debating an increase in the consumption tax," Etsuro Honda, one of the architects of Abe's reflationary policies, told Reuters.
Monday's data is preliminary, with a revision due Dec. 8. Since some of the decline was due to reductions in inventory, things may not be as bad as the GDP reading suggests, economists said.
Pierre Ellis, senior economist at Decision Economics in New York, said increased business orders in the past three months for machinery, industrial equipment and other big ticket items should boost output in the coming months.
Abe already was expected to announce additional economic stimulus this week. The dismal Monday morning data will probably lead him to announce a package worth between 3 trillion yen and 4 trillion yen ($26 billion to $35 billion), Nishioka said.
That could include subsidies to low-income families and help for small- and medium-sized companies that rely on imported components and energy that have suffered as the Japanese yen has weakened from about 80 to the dollar to its current level of about 116 to the dollar — a move that has helped exporters.
Critics say Abe has failed to deliver on promises for drastic reforms of labor regulations, the tax system and the health industry, among other areas. Meanwhile, companies have largely refrained from passing windfall gains from growing share prices and surging profits onto their workers in the form of higher wages.