Japan’s gross domestic product shrank by 1.6 percent in an annualized basis in the quarter ending in September, according to the preliminary report released by Cabinet Office.

On quarter-on-quarter basis, the country's GDP fell by -0.4 percent in the third quarter. Contraction in second successive quarter indicates that Japanese economy unexpectedly fell into recession in the third quarter and that the effect of the first sales tax hike has been worse than expected.

Household spending grew by 0.4 percent in the third quarter, while capital spending by firms remained on the lower side, falling 0.2 percent.

Earlier Prime Minister Shinzo Abe had said that Monday’s GDP data would be crucial to his decision as to whether they should go ahead with the sales tax hike next year or not.

At a meeting of Group of 20 leaders in Brisbane, Australia, on Sunday, Mr. Abe said, “Raising the consumption tax is supposed to increase government revenues, but if we fall back into deflation it will all be for nothing.”

Analysts expect Prime Minister Abe to call snap elections sooner so as to minimize the loss of the number of parliamentary seats.

Etsuro Honda, a University of Shizuoka professor and a prominent outside architect of Abe’s reflationary policies, told Reuters, “This is absolutely not a situation in which we should be debating an increase in the consumption tax. Debate needs to focus on how to support the Japanese economy.”

Koya Miyamae, senior economist at SMBC Nikko Securities, said that recent weak GDP data mean “it’s definite there will be a tax-hike delay and a dissolution of the Lower House.”

However, Hajime Takata, chief economist at Mizuho Research Institute laid more emphasis on long-term view and said that the tax plan was a must and added, “We shouldn’t be too obsessed with the July-September GDP data. Rather, it’s better to take a longer term view on how the economy has been doing over the past two years. The economy seems to be on track for a sustainable recovery, but the current situation is still as if it has caught a cold: it needs medicine-three drugs comprising monetary easing, fiscal stimulus and a growth strategy (structural reforms).”

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