By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) - Japanese Prime Minister Shinzo Abe said on Tuesday that he would call an early election to seek a fresh mandate for his economic policies, and postpone an unpopular sales tax rise, a day after data showed the economy had slipped back into recession.
The world's third-biggest economy unexpectedly shrank for a second consecutive quarter in July-September, a sign the pain from an initial rise in the sales tax to 8 percent from 5 percent in April was lasting longer than expected.
Abe said he would delay a second increase to 10 percent that had been scheduled for October 2015 for 18 months. He added he would dissolve the lower house on Friday for an election that must be held within 40 days. The vote is expected on Dec. 14.
The prime minister - who returned to power in December 2012 pledging to revive growth with a radical mix of hyper-easy monetary policy, spending and reform - insisted his policies were working and challenged the opposition to come up with an alternative.
"I am aware that critics say 'Abenomics' is a failure and not working but I have not heard one concrete idea what to do instead ... Are our economic policies mistaken, or correct? Is there another option?" he asked at a televised news conference. "This is the only way to end deflation and revive the economy."
But Abe pledged that the sales tax rise, needed to fund swelling social security costs and curb Japan's massive public debt, would be implemented without fail in April 2017.
Abe is seeking to renew his mandate just as doubts about the success of his strategy are deepening.
No election for parliament's lower house needed to be held until late 2016. But Abe is hoping to cement his grip on power before his support ratings, now below 50 percent in some surveys but still sturdy by Japanese standards, slip further.
His voter support took something of a hit from funding scandals in his cabinet last month, and next year he is expected to tackle unpopular policies such as restarting nuclear reactors that went off-line after the 2011 Fukushima crisis.
FLAG OF FISCAL REFORM
Critics say that Abenomics has benefited big companies and affluent city dwellers by weakening the yen and boosting the stock market, but that ordinary Japanese have been hurt because inflation has outpaced wage increases.
Abe said consumption was stalling despite other positive signs and he would prepare stimulus steps, especially for smaller firms and regions.
European shares followed Tokyo higher on hopes for further stimulus, but Japanese media reports said the package would be modest at around 2-3 trillion yen ($17-$26 billion).
Measures will include shopping vouchers to promote consumption, a government official said.
The sales tax has been a jinx for Japanese leaders in the past, several of whom lost their jobs over the levy. A hefty majority of voters were opposed to raising it now.
Still, Abe took care to avoid the impression that Japan was abandoning fiscal reform despite a public debt that is already twice the size of the economy.
"We are by no means surrendering the flag of fiscal reform," he said. "(The tax rise) will not be delayed a second time."
The bad economic news has given the opposition camp ammunition for the election campaign, although the parties are weak and divided and likely to have trouble cooperating.
Tatsuo Kawabata, a senior official of the opposition Democratic Party, told a news conference that the prime minister was attempting to cover up signs that Abenomics was failing.
Few expect the LDP and its smaller ally to lose their majority. But financial markets and analysts are now contemplating the possibility that the ruling bloc might fare less well than initially anticipated and that Abe could emerge weaker after the vote.
Abe said he would resign if the ruling coalition, which now holds two-thirds of the seats in the chamber, failed to win a majority.
"A recession will give opposition party attacks on Abe more salience, suggesting the possibility that the ruling coalition could lose seats," wrote Tobias Harris at consultancy Teneo Intelligence. The LDP and the Komeito party now hold a two-thirds majority in the lower house.
Abe, who is serving his second term as prime minister after a troubled 2006-2007 term, inherited the sales tax plan from his predecessor based on a ruling-opposition party agreement in which he played no direct part.
(Writing by Linda Sieg; Additional reporting by Stanley White and Takaya Yamaguchi; Editing by Alex Richardson)
