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Japan Slips into Recession; Shinjo Abe Calls Snap poll
Nov 21, 2014

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 percent pace in the July-September quarter, 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 percent 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 5 percent to 8 percent, and spending has languished since then. The impact of the sales tax was much more severe than expected.

Housing investment plunged 24 percent from the same quarter a year ago, while corporate capital investment sank 0.9 percent. Consumer spending, which accounts for about two-thirds of the economy, edged up just 0.4 percent.

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 industrialized 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 Shinjo 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.

Household incomes, meanwhile, peaked more than a decade ago, and a growing share of workers are having difficulty making ends meet with part-time, contract work. Wage increases—mostly limited to a small share of workers in big-name companies—have lagged behind inflation.

Shinjo Abe already was expected to announce additional economic stimulus this week. But this  dismal data will probably lead him to announce a package worth about 3 trillion yen to 4 trillion yen ($26 billion to $35 billion). That could include subsidies to low-income families and help for small and medium-sized companies that rely on imported components and energy that have suffered as the Japanese yen has weakened from about 80 to the dollar to its current level of about 116 to the dollar—a move that has helped exporters.

Abe Calls for Snap Poll: Japanese Prime Minister Shinzo Abe said that he would call an early election to seek a fresh mandate for his economic policies, and postpone an unpopular sales tax rise, after data showed the economy had slipped back into recession. He said he would delay a second increase to 10 percent that had been scheduled for October 2015 for 18 months. He added he would dissolve the lower house for an election that must be held within 40 days. The vote is expected on Dec. 14.

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