Japan Unexpectedly Falls to Recession Pushing Yen Higher

Japan has surprisingly fallen into recession in the third quarter leading to reversal of carry trades and a rally in the yen.

Japan's GDP fell 1.6% from a year earlier in the third quarter while analysts were expecting a 2.1% rebound from the 7.3% decline registered for the April-June quarter, data showed.

Analysts said the data confirms that Prime Minister Shinzo Abe's economic policies have not been successful, which could prompt him to delay the proposed second round of sales tax hike and call for a snap poll.

According to the data, consumption and exports remained weak, saddling companies with huge inventories.

Abe had said that he would depend upon data outcomes before deciding on implementing the second increase in sales tax to 10% by October 2015.

Japan's is suffering from a huge public debt, the worst among advanced nations, and the tax hikes are aimed at easing the burden.

Yen Rally

The 31 October Bank of Japan policy was a surprise to the markets as the central bank decided to expand its monetary base by a huge margin in a bid to boost growth and increase the upward pressure on prices.

The move had weakened the Japanese currency to multi-year lows versus majors and triggered a rally in Japanese stocks. But Monday's data has helped a reversal and the yen is trading higher while the Nikkei index is falling.

The USD/JPY dropped to 115.46 on Monday from Friday's close of 116.28, which was its highest close since October 2007. The Nikkei 225 index has fallen 2.96%.

Snap Poll

The lower house of Japan's parliament has time up to late 2016 but Abe may look to take advantage of his relatively robust ratings, according to Reuters.

It will help him press ahead with political and economic policies such as a controversial shift away from Japan's post-war pacifism.

With the opposition divided and weak, Abe's Liberal Democratic Party is expected to keep its majority in the lower house, but it could lose several seats, analysts predict.

A TV survey last week found that Abe's voter support had fallen 8 percentage points to 44% from a month earlier.