Japan's economy, considered as the world's third largest, has contracted at 1.6 percent in the July-September quarter, the government said Monday.

Japan's economy is bracing for a recession given that this is the second consecutive quarter that the economy has shrank.

Reports of Japan's contracted economy reverberated to its financial markets, and to other countries as well, causing its share benchmark to tumble by 3 percent, leading other Asian shares to also drop.

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Shares tumbled in early trading in Europe. Dow Jones and S&P futures have also gone 0.5 percent down.

Japan's economic drop could also have a significant impact on international trade, especially if companies decide to reduce investment and cut its imports, particularly machinery, electronics and raw materials.

Japan may be a small island nation, but it is one of the world's largest importers of food. The country is so far the third-largest consumer of natural gas.

Prime Minister Abe is expected to delay the second sales tax hike that could see taxes to rise to 10 percent, which should take place October next year.

This measure would definitely relieve the economy from pressures, although it could also minimize the country's progress as it rids the government from debts.

Abe's decision to postpone the tax hike might also give him the reason to call for a snap election in December to ensure that he, his party, and his plans to revive the sagging Japanese economy receive the mandate of the public.

However, economists believe that delaying the tax hike could actually undermine Japan's ability to get on the way to economic recovery, although there are also those who say that tax increase are just "excess payload on the 'rocket of Abenomics,'" Associate Press writes.  

Last year, Abe and Bank of Japan Gov. Haruhiko Kuroda united in seeking to end the long spell of deflation that they say is discouraging companies and consumers from spending money.

To counter the effect of an impending recession, Abe is already setting up an extra stimulus worth between 3 trillion yen to 4 trillion yen ($26 billion to $35 billion) as form of subsidies to low-income families as well as for smaller companies that are most likely to suffer from rising costs of imported energy and materials.