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Japan’s economy slides into recession as sales tax hike takes toll

Deepens global uncertainty as growth slows in China and remains nearly flat in the 18-country euro zone.

By: Associated Press | Mumbai/tokyo, Tokyo |
November 18, 2014 1:28:02 am

Japan’s economy unexpectedly slid into recession as housing and business investment declined following a sales tax hike, 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 Monday, contrary to predictions it would grow after a big drop the previous quarter. An economy is generally considered to be in recession when it fails to grow for two consecutive quarters.

This is not just bad news for Japan. It deepens global uncertainty as growth slows in China and remains nearly flat in the 18-country euro zone. Japan’s weakness could be a drag on growth elsewhere if its companies cut investment and buy fewer imports such as machinery, electronics, raw materials and food.

The US economy, which grew at a 3.5 per cent pace last quarter, is outpacing most of the developed world.

Japan’s GDP figures showed across-the-board weakness in demand among consumers and manufacturers. Many individuals and companies stepped up purchases before the sales tax was hiked in April to 8 per cent from 5 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 announce on Tuesday that he will delay a second sales tax hike, planned for next October. That would relieve pressure on the economy, but slow progress on efforts to rein in Japan’s government debt, the largest among industrialised nations.

Abe is also likely to use the decision to delay the tax hike as a reason to call a snap election in mid-December to secure a public mandate for this course of action given his promises to fix Japan’s finances. Given the drop in GDP, that choice may be puzzling, 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 Abe took office in December 2012.

But the country is struggling to regain momentum as its population declines and ages.

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