Japan’s economy unexpectedly shrank for the second consecutive quarter, leaving the world’s third largest economy in technical recession.
Gross domestic product (GDP) fell at an annualised 1.6% from July to September, compared with forecasts of a 2.1% rise.
That followed a revised 7.3% contraction in the second quarter, which was the biggest fall since the March 2011 earthquake and tsunami.
Economists said the weak economic data could delay a sales tax rise.
Sales tax delay
Prime Minister Shinzo Abe is widely expected to call a snap election to seek a mandate to delay an increase in the sales tax to 10%, scheduled for 2015.
The tax increase was legislated by the previous government in 2012 to curb Japan’s huge public debt, which is the highest among developed nations.
April saw the first phase of the sales tax increase, from 5% to 8%, which hit growth in the second quarter and still appears to be having an impact on the economy.
The economy shrank 0.4% in the third quarter from the quarter previous.
The data also showed that growth in private consumption, which accounts for about 60% of the economy, was much weaker than expected.
The next tax rise had already been put in question by already weak economic indicators.
“The Japanese economy is in recession and has now contracted in three of the last four quarters,” said Glenn Levine, senior economist at Moody’s Analytics.
“The most likely course is now a snap election in December in which voters choose, naturally enough, to delay the tax increase.”
Speculation had been growing that the Japanese prime minister would call an election next month to gain support just two years after his election.
Local media are now reporting that Mr Abe could announce the next election as early as Tuesday to be held on 14 December.
The Japanese government’s chief spokesperson Yoshihide Suga said on Monday that Mr Abe was expected to decide on various steps to take amid the “severe economic situation”.
While Mr Abe’s popularity has fallen since he took office in 2012, he is expected to win if an election were called, because the opposition remains divided.
In reaction to the negative economic data, the dollar went above 117 Japanese yen before settling back at 115.69.
The benchmark Nikkei 225 index, meanwhile, closed down almost 3% to 16,973.80, marking its biggest one-day drop since August.