Japan in recession as economy contracts for second straight quarter

In this Friday, Sept. 26, 2014 photo, trucks leave a container wharf in Tokyo. Japan reported Monday, Nov. 17 that its economy contracted at a real annual rate of 1.6 percent in July-September in the second straight quarterly decline. Most economists had forecast the world’s third-biggest economy expanded at about a 2 percent pace. T (AP Photo/Koji Sasahara)

TOKYO -- Japan reported Monday that its economy contracted at a real annual rate of 1.6 percent in July-September, in a second straight quarterly decline that returned the country to recession.

A steep drop in residential investment failed to offset a modest recovery in exports, the government reported.

Most economists had forecast the world's third-biggest economy expanded at about a 2 percent pace. The negative growth figure was much lower than expected and makes it very likely Prime Minister Shinzo Abe will delay implementation of a sales tax hike planned for October, 2015.

The economy contracted 7.1 percent in April-June after the national sales tax was raised to 8 percent from 5 percent. The decline in July-September represented a 0.4 percent decrease from the previous quarter.

Japan emerged from its last recession in late 2012, just as Abe took office pledging to restore the country's economic vigor.

The release Monday of the preliminary quarterly economic data, normally a routine event, was received with far more attention than usual since Abe is expected to make the dismal GDP reading the basis for calling a general election.

"In light of the sharp fall in today's preliminary estimate, it now looks likely that (Prime Minister) Abe will call off the hike and announce snap elections," economist Marcel Thieliant of Capital Economics said in a commentary.

Abe wants a renewed mandate for his "Abenomics" policies aimed at revitalizing the economy through lavish injections of cash into the economy by the central bank, strong public spending and reforms intended to improve the country's waning economic competitiveness.

Tax increases are crucial for getting Japan's battered government finances into better shape, and putting off the hike slated for next year carries some risk that financial markets may doubt Japan's resolve to restore its ailing public finances. After many years of deficit spending the total public debt is more than twice the size of the economy and the largest among developed nations.

But Abe and his advisers appear to view the threat to Japan's recovery, which has limped along since the April 1 increase in the sales tax to 8 percent from 5 percent, as the more urgent risk.