Japan slides into recession as tax hike takes toll

Tokyo, Nov 17: Japan's economy unexpectedly shrank in the third quarter as housing and business investment declined following a tax hike, dragging the country into a recession and further clouding the outlook for the global economy.

The world's third-largest economy contracted at a 1.6 per cent pace in the July-September quarter, the government said today, contrary to predictions it would grow after a big drop the previous quarter.

The surprise deepens uncertainty when China's growth is slowing and the 18-country Eurozone grew only 0.2 per cent in the same quarter. The gross domestic product figures showed across-the-board weakness in demand among consumers, manufacturers and builders.

Many individuals and companies had spent money before the sales tax was hiked in April from five per cent to eight per cent, 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 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, Prime Minister Shinzo Abe is expected to put off another sales tax hike planned for next October, slowing progress on efforts to rein in Japan's government debt, the largest among industrialised nations.

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.

PTI