Japanese Prime Minister Shinzo Abe said yesterday he would delay a planned rise in the nation's sales tax to 10pc until April 2017 and call a snap election to seek a fresh mandate, just two years after taking office.
The economy unexpectedly slipped into recession in the third quarter, data released on Monday showed, a sign the pain from an initial rise in the sales tax to 8pc from 5pc in April was lasting longer than expected.
Abe said he would dissolve parliament on Friday.
No election needs to be held until late 2016. But political insiders say Abe - who returned to power in December 2012 pledging to fix the economy with his "Abenomics" strategy of ultra-loose monetary policy, spending and reforms - wants to lock in his mandate while his ratings are relatively high and before tackling unpopular policies next year.
Delaying the tax hike will slow Japan's work on repairing its public finances. But Abe said the risk to the economy was a bigger threat. Fresh elections may seem a puzzling decision given the bad news on the economy. But the Liberal Democrats have a solid majority and hope to further consolidate their power while opposition parties are weak and in disarray.
The general election will seek a renewed public mandate for Abe's all-or-nothing bid to revive Japan's economy, which has suffered from deflation and stagnation for two decades. After taking office two years ago, Abe declared "Japan is Back" and vowed to restore his country's fading economic might.
Japan needs more tax rises to get its swollen government debt under control, but the April tax increase crushed consumer and business spending.
Abe got a rare second term as prime minister, having stepped down just a year into his rocky first term in office in 2006-2007. His support ratings started out high, as share prices surged in early 2013. But they have fallen recently. Parliament got bogged down in squabbles over campaign finance scandals that led to resignations of two ministers.
By dissolving parliament for an election Abe can clear the slate and once again reshuffle his cabinet, said Michael Cucek, a Tokyo-based analyst at Temple University Japan. He described the sales tax hike and Abe's policy of lavish fiscal and monetary easing as "mutually contradictory economic programmes."
The decision to push ahead with April's increase in the sales tax, has been judged a miscalculation by some of Abe's advisers, including Koichi Hamada, a former Yale University economics professor who helped draft Abe's policies.