GDP shrank 1.6% on an annualised basis as firms held back on capital investment

Japan’s economy slipped to recession in the third quarter for the second time in a row. This has set stage for Prime Minister Shinzo Abe to delay sales tax hike and call for a snap election halfway through his term.

Japan’s real GDP shrank 1.6% on an annualised basis as firms cut inventories and held back on capital investment. The figures came as a shock as not many economists had forecast a contraction.  This is the second quarter of contraction after the economy shrank 7.3% in the April-June quarter.

The downturn has been mainly blamed on rising sales taxes that have hurt consumer spending. For instance, private housing investment fell an annualized 24% in the July-September quarter.

Experts say that there should not be any rethinking on whether or not to have a sales tax cut.

On October 31, Japan had announced fresh pumping of money into the economy. The move was seen as an attempt to bring the economy, which has been going though sluggish growth due to sliding global oil prices, back on tracks.

The US, Europe and Japan have all faced choices in recent years between tackling large budget deficits and stimulating economies hit by lackluster demand.

However, there are some who say that Japan needs to move quickly to reduce its government debt, now the highest in the world at more than twice the size of the economy.