Japan's return to recession adds to doubts about Abenomics

Tokyo

JAPAN's economy slid unexpectedly into recession in the third quarter, making it virtually certain that Prime Minister Shinzo Abe will on Tuesday announce the postponement of a further rise in the consumption tax, and suggesting that a snap election he is expected to call could become a risky political gamble.

After slumping by a revised 7.3 per cent in the second quarter following April's tax hike, Japan's gross domestic product (GDP) had been forecast to recover by around 2 per cent in the third quarter but instead it contracted at an annualised 1.6 per cent, confirming recession and shocking both economists and markets.

The latest data were especially dismaying as GDP is calculated comparing one quarter with the preceding one, and the drop in third-quarter output was from the already depressed level of the second quarter.

The Nikkei 225 stock average, which last week hit a seven-week high of above 17,000, yesterday dropped by 517.03 points, or just under 3 per cent to 16,973.80 while the yen slumped initially to 117.06 to the dollar on the news.

A week or so ago, markets were in a celebratory mood after the Bank of Japan announced a dramatic boost in its monetary easing, ostensibly to bolster the chances of meeting its 2 per cent annual inflation target but also, apparently, to provide "cover" for a second consumption tax hike.

The BOJ Policy Board is scheduled to hold its latest monthly meeting on Tuesday but with its ammunition virtually exhausted, there is probably little that the central bank can do to counter recession, short of measures aimed specifically at stimulating consumer spending, economists say.

Mr Abe, who returned Monday from the G-20 summit in Brisbane, is meanwhile set to announce on Tuesday that the planned consumption tax hike to 10 per cent next October (after an initial rise from 5 per cent to 8 per cent in April) will be postponed until April 2017.

The delay may win some consumer approval for Mr Abe but with two of his principal economic advisers now challenging the wisdom of raising the tax in the first place, before economic recovery was firmly entrenched, the prime minister's "Abenomics" policies are coming under increasing attack.

"The right timing of a consumption tax hike is important (so as) not to suffocate recovery," Yale University professor Koichi Hamada, one of Mr Abe's chief advisers, told a briefing on Monday, adding that "I raised my reservations but the government decided to go ahead" with the initial hike.

Reuters quoted Etsuro Honda, a University of Shizuoka professor and a prominent outside architect of Mr Abe's reflationary policies, as saying that "this is absolutely not a situation in which we should be debating an increase in the consumption tax".

The latest Cabinet office GDP data revealed just what a profound impact the April tax hike had on the world's third-largest economy. Consumer spending slumped by 5 per cent in the second quarter and a further 0.4 per cent in this third quarter while corporate capital investment also continued to fall.

"The impact of the tax raise has been greater than we thought", said Minister of Economic and Fiscal Affairs Akira Amari, at a time when Japan is struggling to fully break away from deflation. Chief Cabinet Secretary Yoshihide Suga added that third-quarter GDP "was much lower than the private-sector forecasts" had suggested.

Mr Abe is almost certain to announce this week that he is dissolving Parliament and calling a snap election for Dec 14 - two years before it is technically due. Analysts say that by doing so he hopes to be seen as putting voter interests ahead of pressures to hike the sales tax and bolster Japan's fiscal position.

It is widely speculated that the prime minister is banking too on his Liberal Democratic Party (LDP) and its coalition partner, the New Komeito Party, securing a new four-year mandate ahead of implementing next year security and other policies that have met with significant voter disapproval and resistance.

The parliamentary opposition, led by the Democratic Party of Japan (DPJ), is in a state of some disarray and this too, some analysts say, appears to have emboldened Mr Abe to go to the polls. But the tactic could backfire, others say. leaving the coalition with fewer seats and a weakened political mandate.

Opposition parties have stepped up pressure on Mr Abe for the release of the latest GDP data, Kyodo news service said. It quoted DPJ secretary-general Yukio Edano as saying that "the limit of Abenomics has been shown", in reference to policies centring on aggressive monetary easing, fiscal spending and growth measures.

Prof Hamada said on Monday that he is not overly "worried" by the renewed recession as the economy had been running at an inflation-risking near capacity level until the recent consumption tax hike. But he declined to speculate on how long the recession might last, adding that "I am not a doctor".

* Taxing times for Abe