Election looms as Japan unexpectedly slips into recession

Japan’s conservative government is preparing to call a snap general election after the release of GDP figures showed the economy has slipped into recession.

Prime minister Shinzo Abe will announce the election tomorrow, according to local media, which said the poll date would be set for December 14th – two years since he returned to power.

Mr Abe’s popularity has dipped amid a string of setbacks, topped by the shock announcement today that the economy shrunk by an annualised 1.6 per cent from July to September.

The government had hoped for a rebound from a second-quarter contraction of 7.3 per cent – the worst slump since Japan’s March 2011 disaster. Many economists were predicting a 2 per cent increase.

Investors dumped millions of shares in Japanese companies following the news. Japan’s main share index, the Nikkei, plunged 3 per cent.

Mr Abe is weathering criticism that his radical bid to end 15 years of deflation with fiscal and monetary expansion – dubbed “Abenomics” – is running out of steam.

Prices rose sharply in the last year and household income did not keep pace. Criticism has grown as Mr Abe’s promised structural reforms, designed to reinvent the world’s third largest economy, have been slow to materialise.

Akira Amari, Japan’s economic revitalisation minister, said on Monday that the government’s unpopular decision to hike the sales tax from 5 to 8 per cent in April had a “bigger-than-expected” impact on the economy.

“I do not believe Abenomics has failed,” he said. But he added that the shrinking economy has thrown the government’s plan for a further rise in the tax to 10 per cent into doubt.

One of the architects of Abenomics was more blunt, calling the latest GDP figures “shocking”.

“This is absolutely not a situation in which we should be debating an increase in the consumption tax,” said economist Etsuro Honda.

The election on Sunday of a local politician who opposes Tokyo’s plan to build a military base in the southern prefecture of Okinawa has added to the prime minister’s headaches.

Okinawa governor-elect Takeshi Onaga says he would do everything in his power to block the base, which the government says is vital for Japan’s defence.

Mr Abe is desperate to move the stalled base plan forward after nearly two decades of delays, and promised Okinawa a multi-billion dollar package of economic aid if it dropped its opposition.

Bank of Japan governor Haruhiko Kuroda also raised eyebrows earlier this month when he announced plans to boost annual purchases of government bonds to a record $709 billion. Economists have accused him and the government of creating a bond bubble to try to shore up its faltering economic programme.

Mr Abe is likely to postpone the proposed tax hike and use the December election to win a fresh mandate for his reforms. He is gambling that the weak and divided opposition will not have time to marshal its forces in time for the vote.

If the gamble pays off he could face down opponents in his party, the Liberal Democrats (LDP), say analysts.