Reports that Japan's GDP contracted by 1.7% in the July-September quarter had markets reeling with the news that the country had fallen into its 3^rd recession in 4 years.  A recession is generally understood to be two consecutive quarters of GDP contraction.

Japan's second quarter contraction was 7.1%.

Prime Minister Abe came into office promising to end the ruinous deflation that was dragging the economy down.  He also pledged to address the country's burgeoning sovereign debt crisis.  As for the latter, Abe imposed a massive sales tax increase that led to the second-quarter economic free fall.  That was fully expected, although the level of contraction surprised many economists.

But the conventional wisdom was that the economy would recover slightly in the third quarter.  As the markets found out this morning, this was not to be.

What does recession in Japan mean for the world economy?

Business Insider:

The slump comes as China's growth is slowing and Europe's economy is limping along. It could drag on Asia's growth if Japanese businesses hold back on investing abroad and companies and consumers buy fewer imports. The drop also adds to uncertainties in world financial markets.

WHAT'S NEXT

Prime Minister Shinzo Abe will likely delay another sales tax hike planned for October 2015, and use that decision and the bad GDP numbers as reasons to call snap elections, possibly as early as next month, to seek a public mandate on this course of action. Also, he may want to try to shore up support for the ruling Liberal Democratic Party amid the apparent weakness in the opposition.

BIGGER PROBLEMS

Japan's population is shrinking and aging, creating a smaller domestic market and placing heavier tax burdens on younger wage-earners. Apart from its automakers, Japan's many manufacturers have lost their innovative edge and have been shifting production offshore. Household incomes peaked more than a decade ago, and a growing share of workers struggle to make ends meet on part-time, contract work.

TINKERING WITH TAXES

After many years of deficit spending, Japan needs tax increases to get its battered government finances into better shape and cut its total public debt, which is more than twice the size of the economy and the largest among developed nations. A delay in the tax hike will slow that process.

EXTRA STIMULUS

Abe is hoping that his "Abenomics" policies of lax monetary policy, fiscal spending and structural economic reforms will eventually get growth back on track. Analysts also expect him to announce a package worth about 3 trillion yen to 4 trillion yen ($26 billion to $35 billion) in extra spending on subsidies to low-income families, help for small and medium-sized companies and other measures meant to boost consumer spending and business investment.

The Wall Street Journal reports that Abe is likely to make a dual announcement of snap elections and a delay in the next tax increase scheduled for next year.  The problem is that Japan's slide back into recession will likely cause his party to lose seats, thus weakening his hand even more in taking on entrenched interests in labor and finance.

Looks like Abe's "reforms" will have to await better political conditions.