Japan's GDP unexpectedly contracted 0.4% q/q (consensus: 0.5% q/q, DBM 0.3% q/q) in Q3 after contracting 1.9% q/q in Q2 (revised lower from -1.8% q/q). This means that Japan is technically in recession. For the government, the conclusion will be that the negative impact from the consumption tax hike in April from 5% to 8% has been substantially larger than expected. The implication is that the government will most likely postpone the planned hike in the consumption tax to 10% in October 2015 to April 2017. It also looks increasingly likely that Prime Minister Shinzo Abe as soon as this week will call a snap election for the Lower House to be held in mid-December.
Looking into the details, there was weakness across the board in domestic demand. Private consumption only rebounded modestly by 0.4% q/q in Q3 after contracting sharply by 5.0% q/q in Q2 in the wake of the consumption tax hike. Bad weather probably also weighed a bit on private consumption in Q3. Private non-residential investment (business investments) also unexpectedly contracted 0.2% q/q after contracting 4.8% q/q in the previous quarter. Residential investments continued to contract markedly by 6.7% q/q in Q3 after contracting 10.0% in the previous quarter. Less surprisingly, inventories were cut sharply in Q3 on the back of substantial inventory increases in the previous quarter. Inventory cuts subtracted 0.6pp from GDP growth in Q3.
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