As Japan enters technical recession, early elections seem likely

The fall in Gross Domestic Product, GDP, between July and September that plunged Japan into a technical recession blamed on an historic rise in sales tax appears to be pushing the country towards early elections.

Japan’s economy shrank by an annualized 1.6 percent between July and September, according to data released by the government on Monday.

Economy Minister Akira Amari was quick to point out at a press conference that the impact of the April increase in sales tax the first in 17 years was greater than initially predicted.

Consumption, the pillar of the country’s GDP, grew at only 0.4 percent in comparison to the previous quarter, less than what many economists had anticipated.

Other data is even less encouraging. Capital investment, another important component of GDP, showed a decline of 0.2 percent as compared to AprilJune while home investment experienced a meltdown of 6.7 percent.

Amari placed special emphasis on the negative effects of the sales tax increase, a matter on which Prime Minister Shinzo Abe is expected to base his economic strategy from now on.

This week, Abe is expected to announce a delay in the sales tax hike approved by the parliament for October 2015 as well as the dissolution of the lower house that will pave the way for early elections in December, according to government sources.

Through these elections, Abe, who came to power in December 2012 promising to pull Japan out of economic stagnation, hopes to seek support for his plan to reverse the sales tax hike and forge ahead with his policy of aggressive stimuli.

The idea, say local analysts, is to capitalize on the unpopularity of the sales tax in Japan at the time when the opposition Democratic Party does not seem to enjoy much support among the voters.

The last Democratic Party government under Yoshihiko Noda strongly supported the sales tax increase that was finally approved in 2012.

However, many economists have also talked about the dangers of delaying the tax rise to the fiscal health of Japan, the developed country with the largest public debt in the world (more than double GDP) and an increasingly unsustainable social security system.