TOKYO - Japan's economy sank into recession in the third quarter, figures showed Monday, making it almost inevitable that Prime Minister Shinzo Abe will delay a fresh sales tax rise and call a snap election to fend off party rivals.
Abe's two-year premiership has largely focused on breathing life into an economy plagued by years of deflation, and getting a handle on Japan's soaring national debt.
Raising sales taxes are key to tackling that debt, but a levy increase in April - Japan's first in 17 years -- knocked consumers off their feet, as Abe's approval ratings suffer and he spends political capital trying to restart Japan's nuclear reactors and bolstering the role of the military.
"It now looks likely that PM Abe will call off the hike and announce snap elections," said Marcel Thieliant from Capital Economics.
Gross domestic product shrank 0.4 per cent in the third quarter, or at an annualised rate of 1.6 per cent, underscoring how the tax rise stalled Abe's programme to turn around the world's number three economy.
The market's median expectation was for a 0.5 per cent expansion, according to economists surveyed by the leading Nikkei business daily.
Residential investment fell, as consumer and corporate spending remained tepid. Exports were in positive territory, but shipments of cars and televisions were not enough.
"The decision to put off another tax hike is likely to lift consumer spending to some degree...(and) capital spending is likely to improve, reflecting higher corporate profits thanks to a weaker yen," said Harumi Taguchi, principal economist at IHS Global Insight.
"However, the economy will probably remain weak unless higher corporate profits can support wage increases, and this would raise the risk of another tax hike."
Speculation has been swirling that Abe - who faces a leadership election next year - will delay increasing Japan's sales tax to 10 per cent, after the rise to 8.0 per cent from 5.0 per cent in April.
The economy suffered a revised 1.9 per cent contraction in the April-June quarter - or 7.3 per cent at an annualised rate - reversing a 1.6 per cent expansion in the first quarter when hopes were still buoyant for Abe's growth plan, dubbed "Abenomics".
The economy was last in recession when Abe swept to power in late 2012.
Etsuro Honda, a close adviser to Abe and one of the growth policy's main architects, said Monday's "shocking" data ruled out a levy hike next year.