- Marcel Thieliant, economist at Capital Economics
Japan's economy unexpectedly contracted in the July-September quarter following a severe slowdown in the previous three-month period, reinforcing the view Prime Minister Shinzo Abe is likely to delay sales tax hike scheduled for the next year. According to the preliminary data, Japan's gross domestic product shrank 0.4%, or an annualized rate of 1.6%. The reading came in worst than economists had expected, who had forecasted a 0.5% growth. The economy contracted a revised 1.9% or 7.3% at an annualized rate in the second quarter, which was the biggest drop since the March 2011 earthquake and tsunami. That offset a 1.6% expansion in the beginning of the year when hopes were still buoyant for Abe's pro-spending growth bid, known as "Abenomics". Last month, the Bank of Japan expanded its already huge monetary easing programme to combat the downturn, but the latest data will also fuel speculation of further moves by the central bank. Meanwhile, household spending has remained sluggish, as families and small companies tightened belts to meet higher costs. Private consumption, which accounts for about 60% of the economy, rose 0.4% from the previous quarter, a sign that an increase in Japan's sales tax to 8% from 5% in April continued to take a toll. The USD/JPY skyrocketed to new seven-year highs following the data release, reaching 117.04 at one point, levels not seen since October 2007, while Japan's Nikkei 225 closed nearly 3% lower.
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