TOKYO--A sales tax increase pushed Japan's economy into a recession in the third quarter, setting the stage for Prime Minister Shinzo Abe to postpone a second increase in the sales tax.

Japan's real GDP shrank 1.6% on an annualized basis as firms cut inventories and held back on capital investment. None of the 18 economists surveyed by The Wall Street Journal had forecast a contraction; the median forecast was for a 2.25% expansion.

The figure marked the second quarter of contraction, after the economy shrank 7.3% in the April-June quarter after the national sales tax ticked up to 8% from 5% on April 1. Many economists consider two quarters of economic contraction to be a recession.

Household spending rose 0.4% on quarter in the July-September period, Monday's data showed, while capital spending by firms remained anemic, falling 0.2%.

In one positive sign, however, firms started to cut back on a glut of inventories that was holding back production, the data showed.

The July to September gross domestic product figure took on extra significance because Mr. Abe said he would use it to decide whether to raise the sales tax to 10% in October 2015 from 8% currently, as existing law envisions. Last week, with forecasters predicting lackluster growth, people close to Mr. Abe said he was likely to postpone the increase and call elections in December to seek public support for his growth strategy.

Business leaders were divided on the sales tax, with some saying an increase was needed to show Japan's commitment to stable finances and others saying it was the wrong time to hit consumers' pocketbooks.

"Rather than letting the Japanese economy stall by raising the sales tax again, it would be a better idea to wait for about a year until domestic demand recovers," said Akira Emi, president of Ride On Express Co., the operator of Japan's biggest sushi delivery chain.

Write to Eleanor Warnock at eleanor.warnock@wsj.com and Mitsuru Obe at mitsuru.obe@wsj.com