Shrinking of economy surprises analysts and spells trouble for Shinzo Abe, who is expected to call election for next month

This article is more than 5 years old

This article is more than 5 years old

The Japanese economy has dropped into a recession after a second straight quarter of contraction, in a huge blow to Shinzo Abe’s bid to turn around years of laggard growth.

The country’s gross domestic product shrank 0.4% in the July-September quarter, official data showed on Monday, or an annualised rate of 1.6%. The figures underscored how an April tax rise dented growth in the world’s number three economy and weighed on the chances of a second levy hike next year.

The surprise figure missed market media expectations for a 0.5% expansion, according to economists surveyed by the leading Nikkei business daily, as residential investment dived and consumer spending remained tepid.

The data increases the likelihood that Prime Minister Abe – who is expected to call a snap election for next month – will delay a plan to raise Japan’s sales tax to 10% next year.

A rise to 8.0% from 5.0% earlier this year slammed the brakes on growth.

The country suffered a revised 1.9% contraction in the April-June quarter – or 7.3% at an annualised rate – as consumers and firms capped their spending.

That reversed a 1.6% expansion in the first quarter of the year when hopes were still buoyant for Abe’s pro-spending growth bid, dubbed “Abenomics”.

Last month, the Bank of Japan expanded its already huge monetary easing campaign to counter the downturn, but the latest figures will hike speculation of further moves by the central bank.