Elliot & Associates Research Global Markets: Japan in technical recession

Japan's economy surprisingly shrank this quarter instead of getting revived, prompting a delay in the country's tax hike and a possible snap election.

Japan's gross domestic product (GDP) fell 1.6% in the July-September period, even with predictions of a rise. The previous quarter marked a 7% contraction which was the most drastic fall since 2011.

Surprisingly enough, all 18 economists consulted by Elliot & Associates Research Global Markets predicted a contraction as the average forecast was an expansion of 2%.

Its economy's current state has met one definition of an economy in recession, which is 2 successive quarterly contractions. According to a senior economist, Glenn Levine, "The Japanese economy is in recession and has now contracted in three of the last four quarters."

Prime Minister Shinzo Abe announced, "GDP figures for July-September turned out not so encouraging. We are seizing a chance to exit long-lasting deflation and we cannot miss that chance."

Experts are predicting that with the economy in such a state, the tax raise which was meant to fill in the nation's public debt will be postponed. Abe's popularity may have suffered since his election but this could change if he  would publicly oppose the tax increase.

Abe is now expected to delay the increase until late 2015 and then call a snap election in December aiming to keep the 'Abenomics' going. Consumer spending accounts for around 60% of the economy so it would make sense to delay yet another sales tax increase from the recent 8% to the planned 10%.

According to an analyst from Elliot & Associates Research Global Markets, the "likely course is a snap election in December in which voters obviously choose to delay the tax increase."

This comes after Abe' promise last year to revive Japan's economy with an ambitious strategy which was dubbed  'Abenomics' -- spending and reforms plus a huge monetary stimulus. It aims to help the country recover from 2 decades of deflation onto a growth trajectory. The Bank of Japan promptly went on a big spree and printed billions of dollars to purchase government bonds.

What happened then? Well for one it decreased the value of yen, and made their exports cheaper as a result. For another, it nudged investors from bonds to stocks. Tokyo's stok market skyrocketed and everything seemed to be going very well. Then earlier this year, the government took the risk of increasing consumption tax from 5% to 8%, a first in 20 years. They gave it a shot seeing that the economy is now growing. Unfortunately, the gamble did not pay off. Consumers have practically stopped spending and now their economy is in technical recession.

Looks like the soaring stock market only helped the already wealthy people (only 20% of the Japanese are in the stock market). The expected general increase of salary did not happen while the increase in prices did.