World Economy

Japan Technical Recession Worse Than Thought

Japan Technical Recession Worse Than ThoughtJapan Technical Recession Worse Than Thought

Japan’s economy shrank more than initially estimated in the third quarter of 2014, according to revised gross domestic product (GDP) figures.

The economy contracted by 1.9% in annual terms from July to September, well above a preliminary reading of 1.6%, BBC reported. It also shrank 0.5% on a quarterly basis, compared with an initial estimate of 0.4%, data showed.

A big fall in business spending plunged the economy into a deeper recession.

The revised figures, which come just days before Japan’s national elections, showed that business spending dipped by 0.4% from the previous quarter, instead of the 0.2% estimated in the preliminary reading.

  In Recession

The world’s third largest economy unexpectedly fell into a technical recession after shrinking for the second consecutive quarter in July to September.

It had contracted 7.3% in the second quarter, which was the biggest fall since the March 2011 earthquake and tsunami.

An increase in the country’s sales tax, which was first raised in April from 5% to 8%, had hit growth in the second quarter and still appeared to be having an impact on the economy.

The dire data had led Prime Minister Shinzo Abe to call a widely-anticipated snap election last month, to seek a mandate to delay an increase in the tax to 10%, scheduled for 2015.

The tax increase was legislated by the previous government in 2012 to curb Japan’s huge public debt, which is the highest among developed nations.

Prime Minister Shinzo Abe’s pro-spending growth bid, dubbed “Abenomics”, has stalled as an April hike in the sales tax dented consumer spending and corporate investment, AFP said.

Abe delayed a second tax hike planned for next year to 2017. He also dissolved the lower chamber of parliament for snap elections on December 14, two years ahead of schedule, as he seeks to bolster his public support.

The tax rises are aimed at paying down Japan’s enormous national debt, but they have put Abe in a tricky position as he tries to balance them with his growth plan.

 patchy recovery

The “harsh evidence for Abenomics,” shows that “tame growth in wages in particular is likely to drag on private consumption and broader economic activity,” reuters quoted Takeshi Minami, chief economist at Norinchukin Research Institute as saying.

Adding to the gloom, manufacturers’ confidence slid in December and is expected to deteriorate further, the Reuters Tankan showed, highlighting the patchy nature of the recovery.

The key factor behind the GDP downgrade was a 0.4 percent decline in business investment, revised from a preliminary 0.2 percent fall. Analysts had expected capital spending to be revised up after an upbeat survey last week.

But spending was probably weak for small firms not included in the survey’s sample base and, coupled with other data used in revising GDP, led to the downward revision, a government official told reporters.

An increase in Japan’s sales tax to 8 percent from 5 percent in April hit household spending and clouded the outlook for “Abenomics,” a mix of aggressive monetary expansion, fiscal stimulus and structural reforms aimed at ending economic stagnation.

Abe’s decision to delay the second tax hike to 10 percent by 18 months until April 2017 eased concerns about the outlook for consumer spending, which makes up 60 percent of GDP.

But the recession has also shown that Abe’s stimulus policies have not been enough to strengthen the underlying economy even after two years in office, as companies remain hesitant of boosting wages and capital spending.