TOKYO (AFP, Reuters) - Japan's economy dropped into a recession after a second-straight quarter of contraction, official data showed Monday, in a huge blow to Tokyo's bid to turn around years of laggard growth.

The country's gross domestic product shrank 0.4 per cent in the July-September quarter, or an annualised rate of 1.6 per cent, underscoring how an April tax rise dented growth and weighing on the chances of a second levy hike next year.

The figures will solidify the view premier Shinzo Abe will delay a second sales tax hike next year.

Abe has said Monday's GDP data would be key to his decision on whether to proceed with the increase to 10 per cent in October next year. That decision had been expected by year-end.

The second straight quarter of contraction, which compared with a 2.1 per cent increase forecast in a Reuters poll, added to signs the world's third-largest economy has been slow in healing from the blow to consumption from the first tax increase in April.

The April tax hike to 8 per cent from 5 per cent led to a revised 7.3 per cent economic contraction in the second quarter, which was the biggest decline since the global financial crisis.

Given the prolonged pain from the April hike, an official close to the premier has told Reuters that Abe would postpone the second increase and call a general election in an effort to lock in his grip on power.

Abe, who is returning on Monday from a week-long tour to attend a host of global meetings in Beijing to Australia, is set to make a decision this week, Japanese media have said.

On a quarter-on-quarter basis, the economy fell 0.4 per cent in the third quarter after a revised 1.9 per cent decrease in April-June. Economists had expected growth of 0.5 per cent.

Private consumption, which accounts for about 60 per cent of the economy, rose a less-than-expected 0.4 per cent from the previous quarter, as the April tax increase and unusually cold summer weather hurt households' spending.

Capital expenditure fell 0.2 per cent, against a median market forecast of a 0.9 percent increase.

The lack of a pick-up in exports and the prolonged drag from the April tax increase on consumption have dashed policymakers'hopes that the economy would rebound strongly in July-September and head for a moderate recovery.

Sluggish economic growth and downward pressure on prices from recent global oil price declines prompted the Bank of Japan to expand its massive monetary stimulus last month.