GDP growth between July and September fell by 1.6%, far below analysts’ expectations of growth of 2.1%. That followed a revised 7.3% contraction in the second quarter.

The fall means the second stage of the proposed sales tax hike, which will be decided next month, may no longer go through. Japan’s government had been hoping to raise the sales tax from 8% to 10% next October.

Release of the weak data also comes just weeks after the Bank of Japan announced it was adding billions to its QE programme.

The Nikkei 225 was down almost 3% this morning to 16,973 on the news.    

Chris Towner, managing director of FX advisory services at HiFX, says: “Japan’s approach to its economy of late has been one of ‘shock and awe’; however recently the release of their Q3 GDP reflects the need for big, bold action to try and stimulate their economy.

“Since the decision to raise the sales tax from 5% to 8%, Japan’s already fragile economy has been on the back foot. Following the disastrous Q2 GDP data when Japan’s economy contracted by 7.3%, expectation was for a recovery into the third quarter to the tune of 2.2%. However, instead we saw Japan contract further into the quarter by 1.6% annualised, putting pressure on stocks with the Nikkei falling by 3% – its sharpest drop since August.

“The thought now of further sales tax increases to 10% must be an even more distant dream in order to try and stimulate inflation. Big and bold monetary action is not having the required result and will only lead the Japanese to be even bolder. Doubts already exist as to whether this huge juggernaut can be turned around, despite all these efforts. But it is always darkest before dawn. With the yen becoming even more competitive of late and oil prices 25% lower, Japan has a platform to build from. There are limited headwinds to get in the way of recovery so in the bigger picture Japan needs to recapture the self-belief it had back the 80’s.”