Japan unexpectedly sank into a recession last quarter as the worlds third-largest economy struggled to shake off the impact of an April sales-tax boost, raising the odds of a delay in a second bump in the levy.
Gross domestic product shrank an annualized 1.6 percent in the three months through September, a second straight drop -- matching the textbook definition of a recession. Unadjusted for price changes, the economy contracted an annualized 3 percent, the Cabinet Office said. Japanese stocks slumped.
Aprils sales tax completely destroyed Japans economy -- no part of Japans economy looks encouraging, said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute, who had the weakest forecast in a Bloomberg News survey, with a 0.8% growth estimate for real GDP. Todays data will leave another traumatic memory for Japanese politicians about sales tax hikes.
For Prime Minister Shinzo Abe, the report probably guarantees he will put off the tax increase scheduled for October 2015, a move that people familiar with the matter have said will trigger a snap election next month. Japan also tipped into a recession after a 1997 consumption-levy rise, leading to the fall of the government of the day.
Photographer: Tomohiro Ohsumi/Bloomberg
While exports and consumer spending returned to gains last quarter, they werent strong enough to offset the impact of a slump in the stocks of unsold goods -- a sign that companies were unwilling to boost production. Residential investment was another soft spot, while government spending had a positive impact on GDP.
Recession Blight
Nominal GDP, which is unadjusted for price changes, also shrank a second straight period, at least the fifth such recession in the past decade. The level, which is most important when considering tax revenue or corporate profits, is 7.9 percent below the peak reached in 1997, according to data compiled by Bloomberg.
The April increase of the sales tax to 8 percent from 5 percent triggered in the second quarter the deepest contraction in more than five years. Etsuro Honda, an adviser to the prime minister, said last week that a 2015 value-added tax increase to 10 percent was out of the question if third-quarter growth were less than 3.8 percent.
Japan is in recession -- was pushed into recession by the VAT hike, Jesper Koll, head of Japan strategy at JPMorgan Chase & Co. in Tokyo, said in an interview on Bloomberg Television. Delay in the VAT hike is now a virtual certainty.
Stocks Drop
The yen fell against the dollar after the data were released, briefly dropping below 117 per dollar for the first time since October 2007. The currency rose 0.5 percent to 115.70 as of 3:50 p.m. in Tokyo. The Topix index of shares fell 2.5 percent.
Abe is considering postponing the next tax increase until 2017, people familiar with the discussions said last week. While a general election isnt due until 2016, he will call an early vote to get public backing for his move, people with knowledge of the talks said. Economy Minister Akira Amari told reporters today that the prime minister will make a decision tomorrow or later.
Todays report comes two days before the Bank of Japans next policy meeting. Governor Haruhiko Kuroda last month led a divided board to expand what was already an unprecedentedly large monetary-stimulus program. Kuroda took the surprise decision as forecasts for inflation drifted lower, further away from his 2 percent target.
Living Costs
While the pace of consumer-price gains is running about 1 percent, that still amounts to a sea-change for households accustomed to modest deflation for about 15 years. The 3 percentage-point increase in the sales tax in April also pushed up the cost of living. With inflation outpacing wage growth, a further bump in the levy risked hurting consumption and undermining Abes support.
The median forecast for annualized real growth last quarter was 2.2 percent. The median estimate for nominal GDP was for a 0.4 percent advance.
Private inventories subtracted 0.6 percentage points from GDP in the quarter, indicating companies were unwilling to produce more amid economic weakness.
From the previous quarter, private consumption rose 0.4 percent in the July-September period, compared with a 5 percent drop in the second quarter, todays report showed. Capital spending dropped 0.2 percent in the quarter, compared with a 4.8 percent decline in the previous three-month period.
Trade Impact
Net exports, or shipments less imports, added 0.1 percentage point to GDP, after a 1 percent gain in the previous quarter, todays data showed.
The government approved a 5.5 trillion yen extra budget in December to help the economy weather Aprils tax hike. Finance Minister Taro Aso has signaled readiness to boost stimulus and Abe said last week he would consider compiling an extra budget depending on the economy.
The government is considering measures that may amount to 3 trillion to 4 trillion yen to support the economy, according to a Yomiuri newspaper report on Oct. 31.
Abes ruling Liberal Democratic Party is considering steps to protect against the impact of a weaker yen and higher energy prices as part of a campaign platform for a possible election, the Nikkei newspaper reported last week, without citing anyone.
Further Stimulus
A group of LDP lawmakers who want to delay the next bump in the sales levy estimate the government could have as much as 4.6 trillion yen available for economic stimulus if it doesnt increase the sales tax next year.
Postponing the planned increase by about 18 months would add about 0.5 percent to growth, the group said in a discussion paper obtained by Bloomberg News. The lawmakers, led by lower house member Kozo Yamamoto, estimate that this expansion would have a bigger impact on the amount of tax raised than increasing the levy and risking another economic contraction.
In 1997, then-Prime Minister Ryutaro Hashimoto oversaw a 2 percentage point boost in the consumption levy. The move cost him his job as Japan sank into a recession with consumption swooning against a backdrop of weakening demand abroad due to the Asian financial crisis.
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