Japan falls into a recession, GDP fell by 1.6% in third quarter

The Japanese economy fell into a recession in the third quarter, according to government data released on Monday, with gross domestic product falling at an annual pace of 1.6 percent in the quarter through September.

This adds to the previous quarter decline, which the government now puts at 7.3 percent.

The negative growth was caused by an increase in sales taxes, a policy which was set in motion to curb the *national debt but has had a severe economic impact. The tax on all goods and services sold in the country stands at 8 percent.

* The national debt is the total amount of money a nation’s government owes its citizens as well as foreign debtors.

At a G20 meeting in Brisbane, Australia on Sunday, Japanese Prime Minister Shinzo 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.”

People close to the Prime Minister have said that the sales tax hike has become an increasingly debated political issue in Japan. Mr. Abe is even exploring the option of dissolving Parliament and calling for new elections.

After Monday’s data shows the country has back-to-back quarters of negative growth, a new mandate from voters to amend the tax plan looks very possible. Most economists today say a country is in recession when two successive quarters post GDP contractions.

Third quarter GDP data has been somewhat of a shock to analysts, many of whom were optimistic about the Japanese economy getting back on track. In fact, surveys by news agencies revealed that, on average, economists were expecting annual growth of over 2 percent.

One of Mr. Abe’s chief economic advisors, Etsuro Honda, has stated that in order for the Japanese government to increase taxes again there needs to be growth of around 4 percent – much higher than the negative result posted this quarter.

The next tax increase is not set to go into affect until October, however, the Prime Minister should think about whether to cancel or postpone it soon, this would give parliament time to make the necessary changes.

If the next tax increase goes ahead then sales tax in Japan would increase to 10 percent.

The reason why Japan is enacting these tax hikes is because of the large amount of government debt it has – one of the largest in the developed world. Yet, it appears that increasing taxes has had more of a negative impact on the economy than expected, pushing the economy into another recession.