Japan falls into recession as sales tax weighs on consumer spending

Good morning,

• Japan falls into recession as sales tax weighs on consumer spending;

• Next October's hike called into question, while further BoJ stimulus a possibility;

• Eurozone trade balance and US industrial production stand out on the economic calendar today;

• Draghi testimony on monetary policy could shake things up in the markets this afternoon.

The trading week got off to a woeful start in Asia overnight as news that Japan contracted by 0.4% in the third quarter, leaving the country in a technical recession, drove the Nikkei to near 3% losses and raised serious questions about the planned sales tax hike next year.

The sales tax hikes have been a key component of Abenomics - Japanese Prime Minister Shinzo Abe's attempts to return inflation to 2% and increase growth in the country through fiscal and monetary stimulus and reforms - but it appears that the first hike from 5% to 8% has taken its toll on the economy more than expected.

A couple of things spring to mind now following the release of this data overnight. The first is the planned hike to 10% next October and whether that will now be pushed back, something that has already been rumoured in recent weeks. The second is the Bank of Japan's surprise increase of its asset purchase program a few weeks ago, which now makes perfect sense if the central bank's analysis anticipated the latest GDP figures, and whether we'll see further monetary loosening in the coming months.

Clearly the country is not coping well with the 3% increase in the sales tax, which came into effect in April. With 60% of the economy being fuelled by the consumer, something needs to be done to drive consumption or the BoJ will have no chance of hitting its 2% inflation target. I also imagine that the next tax hike will have to be pushed back which may raise questions about Abe's commitment to the "third arrow" of Abenomics. I personally think pushing it back is the correct thing to do, at the end of the day the economy can't grow and inflation can't rise to 2% if people refuse to open their wallets. People need time to adjust and Abe's initial targets have proven to be too aggressive.

The start of the trading week in Europe will not be quite as exciting, with the data due out on Monday being few and far between. We have trade balance figures from the eurozone shortly after the open, while in the US later we'll get the latest industrial production figures for October, as well as the Empire State manufacturing index for the same month.

We'll also hear from ECB President Mario Draghi, who is scheduled to testify on monetary policy before the Committee on Economic and Monetary Affairs, in Brussels. This could be quite a big market event today as not only is Draghi likely to be heavily questioned on the ECBs efforts to avoid deflation thus far, which are showing little sign of working, he's also likely to be pressed on further attempts to lift its balance sheet to two trillion euros. Clearly the markets want to see quantitative easing and while Draghi is happy for investors to believe this is a strong possibility, I don't think some policy makers are keen on it in the slightest. The markets don't really care about this though, they just want to be led on which is why market volatility could pick up around this testimony.

The FTSE is expected to open 17 points lower, the CAC 15 points lower and the DAX 46 points lower.