Asia report: Japan's Abe to dissolve parliament, postpone sales tax

Japanese stocks advanced in anticipation that prime minister Shinzo Abe would announce ‘snap elections’ and a delay to an unpopular but necessary sales tax hike.

The speculation came in the wake of preliminary third quarter gross domestic product (GDP) data on Monday, which confirmed Japan had fallen back into recession, with the rate of economic expansion declining by 1.6% in the third quarter of the year, a far weaker outcome than the 1.2% rise which had been expected.

In a press conference held after the close of trading on Tuesday, Abe said he would dissolve the lower house of parliament on 21 November and postpone a planned consumption tax hike by 18 months to April 2017.

The benchmark Nikkei-225 ended the session higher by 2.18% at 17,344.06 points in Tokyo.

"Abe will turn to the polls to see if his decision not to raise the tax rate to 10% next October can gain public support amid growing signs of weakness in the Japanese economy," the Nikkei Asian Review wrote before the press conference.

For some observers the Japanese leader is trying to get in front of possible weakness in the economy by calling for early elections. If his Liberal Democratic Party (LDP) can retain its hold on power until 2018 then he may have a better chance of accelerating his program of economic reforms, dubbed ‘Abenomics’.

The heightened uncertainty made itself felt in the bond markets. An auction of 1.2trn yen ($10bn) in 20-year bonds saw the bid-to-cover ratio fall to a five-month low with yields increasing by five basis points to 1.29%.

In an interview published on Sunday, one of the architects of Abe's 'Abenomics' policies agreed with comments from fund manager Marc Faber that Japan's recent policies have been a "mild Ponzi" scheme as the BoJ is buying up most of the debt that has been issued by the government.

Over in China equities were trading weaker following disappointing house price data.

New home prices have dropped in 69 out of 70 cities in October relative to September and the average is now 2.6% lower versus last year.

The Shanghai Stock exchange’s composite index finished the day 0.71% lower at 2,456.37 points.