The world's third-largest economy contracted at a 1.6 percent pace in the July-September quarter, the government said on Monday, contrary to predictions it would grow after a big drop the previous quarter.

The surprise deepens uncertainty when China's growth is slowing and the 18-country eurozone grew only 0.2 percent in the same quarter.
The gross domestic product figures showed across-the-board weakness in demand among consumers, manufacturers and builders. Many individuals and companies had spent money before the sales tax was hiked in April from five percent to eight percent, and spending has languished since then.
"The impact of the sales tax was much more severe than expected," said Junko Nishioka, an economist at RBS Japan Securities.
Housing investment plunged 24 percent from the same quarter a year ago, while corporate capital investment sank 0.9 percent. Consumer spending, which accounts for about two-thirds of the economy, edged up just 0.4 percent.

Given the contraction, Prime Minister Shinzo Abe is expected to put off another sales tax hike planned for next October, slowing progress on efforts to rein in Japan's government debt, the largest among industrialised nations.     

He also will likely make the dismal GDP reading the basis for calling a general election in mid-December to underpin the public mandate for his "Abenomics" policies of lax monetary policy, fiscal spending and structural economic reforms.     

Japan emerged from its last recession just as Abe took office in December 2012, vowing to restore the nations' economic vigor after two decades of stagnation.
But the country is struggling to regain momentum as its population declines and ages. Apart from its automakers, many of its manufacturers have lost their leading edge in innovation while shifting production to cheaper locations offshore.

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