Japan's GDP shrinks even more than thought

Japan's economy contracted 1.9 per cent in annual terms in the July-September period, according to revised data released Monday that confirmed a recession in the world's third-largest economy ahead of an election next weekend.

Data for both business and public spending were worse than anticipated. Most economists had forecast an upward revision of earlier figures showing a 1.6 per cent contraction.

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On a quarterly basis, the economy shrank 0.5 per cent. The earlier estimate was that it had fallen 0.4 per cent. In the April-June quarter, the economy contracted 7.3 per cent.

Economists say adjustments in inventories are overstating the weakness of the economy somewhat, and that monthly data are more upbeat.

"The upshot is that the economy likely returned to growth this quarter," Marcel Thieliant, of Capital Economics, said in a commentary Monday.

A sales tax hike to eight per cent from five percent on April 1 is seen as the main reason why the economy has faltered after recovering from the last recession in late 2012. Late last month, Prime Minister Shinzo Abe postponed a planned increase in the tax to 10 per cent that was due to take place in 2015. It was put off until April 2017.

Abe also dissolved parliament and called a snap election, saying he wanted to win a public mandate for the tax decision and other policies. He has promised to step down if his Liberal Democratic Party failed to keep its parliamentary majority, but given the lack of a strong opposition,polls suggest that is highly unlikely.

Abe has sought to end years of deflation with a combination of heavy public spending and aggressive monetary easing meant to push the economy toward an inflation target of two per cent. So far, inflation is at less than half that level.

The hope is that expectations of higher prices will lead consumers and businesses to spend more, helping to sustain growth. Abe's government has also promised major reforms to help improve Japan's competitiveness. But so far those reforms have made little headway.