MOSCOW, November 17 (Sputnik) — Japan reported an unexpected technical recession in the third quarter on Monday, dragging the Nikkei stock index down along with global crude prices, and giving reason enough for PM Shinzo Abe to delay further measures of fiscal consolidation.
Data released Monday shows that economy of Japan contracted by 1.6% year-on-year during the July-September quarter, which might have been a good result after a slump of 7.3% in the previous quarter had experts not expected growth of 2.1% this quarter, according to a report by the Globe and Mail.
The contraction in the second quarter was caused mainly by a sales tax increase from 5% to 8%, implemented this past April, a measure used as an attempt to boost inflation. The negative effect on economic growth had been expected to be over before the third quarter, but those forecasts have proven to be wrong. According to PM Abe’s plan to counter deflation, the second tax hike, from 8% to 10%, would be undertaken in October 2015. However, the government now has decided to delay the second tax increase, Reuters reports.
Last week, Abe said he would call for a pre-term election should the delay in tax hike seem necessary. As this is now the case, Abe will have to revise a 2012 fiscal legislation timeline for tax increases in parliament. However, that same legislation said the second tax hike would happen only “on the condition of a favorable turn in economic conditions”, which means a target growth of at least 2%, which had been expected this quarter, but never happened. Therefore, PM Abe would not need to call for an advance parliamentary election unless he desires.
"This is absolutely not a situation in which we should be debating an increase in the consumption tax," Etsuro Honda of the PM Abe economic team told Reuters.
The current recession was unexpected, as many believed that the unprecedented monetary easing, which increased bond repurchases by the Bank of Japan by 60% early this month would spur the economy enough to show growth. However, the real effect of this move is yet to be seen.
“It’s a bit of shock for the market, because people believed that the Bank of Japan had everything under control. But overall, the initial negative reaction shouldn’t last too long. Investors still expect central bank action worldwide to support the global economy,” Nicolas Cheron of FXCM said as quoted by the Globe and Mail.
The Nikkei stock market index fell by 3%, pushing yen FX rate up against dollar, which is bad news for Japan’s exporters. Global oil price slid $1 to $74.97 a barrel of Brent as Japan is one of the world’s biggest fossil fuels importer. The slump of Nikkei caused a massive spillover into Asia-Pacific stocks, dragging both Shanghai Composite and Hang Seng down by 0.2% and 1%, respectively, completely eradicating the positive effects of the newly opened Stock Connect between the two exchanges.
"The GDP data was so unexpectedly weak and clouded many prospects taken for a given," Masafumi Yamamoto of Praevidential Strategy in Tokyo told Reuters.
Japan’s Minister of Economy Akira Amari announced that some further stimulus measures could be implemented, but they will be hard to properly devise as fiscal discipline should be observed, which means it will take some time before any new easing is introduced.
Quarter-on-quarter the economy contracted 0.4% after a decrease of 1.9% in the previous quarter. Analysts had been anticipating a quarterly growth of 0.5%.
However, Japan’s economy may improve in the fourth quarter as private consumption, which constitutes roughly 60% of the economy, rose 0.4% quarter-on-quarter. The problem is inflation is not accelerating much so the PM’s economic strategy dubbed Abenomics does not seem to work yet.