Japan economy shrinks more than expected, backs Abe's tax decision

Sun Dec 7, 2014 9:33pm EST
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By Leika Kihara

TOKYO (Reuters) - Japan's economy shrank more than initially reported in the third quarter on declines in business investment, data showed on Monday, surprising markets and backing premier Shinzo Abe's recent decision to delay a second sales tax hike.

The hit from an April sales tax hike turned out to be bigger than expected, the revised gross domestic product data indicated, underscoring the challenges Abe and the Bank of Japan face in pulling the world's third-largest economy sustainably out of deflation.

The revision to an annualized 1.9 percent contraction from a preliminary 1.6 percent fall confirmed Japan slipped into recession and confounded a Reuters poll projecting a 0.5 percent contraction.

Abe, who has called a snap election for Sunday, hopes voters will agree that his stimulus policies and delay in the planned second tax hike next year will revive a sputtering economy. Media polls predict a landslide victory for his coalition.

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

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.   Continued...

Cranes are pictured at a construction site at the coastal area of Tokyo Bay in Tokyo November 27, 2014. REUTERS/Issei Kato