Japan has suffered since the first consumption tax hike from 5 to 8 percent in April. Abe said the rise in the sales tax "acted as a heavy weight and offset a rise in consumption". A second consumption tax hike was set for October 2015 which would have seen a 2 percent increase to 10 percent.
Abe also said the lower house of parliament would be dissolved on November 21 and an election would be called in a move to strengthen his mandate for "Abenomics" - his set of economic policies.
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The Japanese Prime Minister admitted that it will be a "difficult election" but said he wanted the public to back his package of reforms.
"There are differing opinions on the structural reforms we have proposed and I have decided that I need to hear the voice of the Japanese public on whether or not we should go forward with these reforms," Abe said.
The Nikkei closed up 2.18 percent in anticipation of Abe's announcement, while the yen strengthened against the dollar hitting $116.49 by mid-morning following the news.
Analysts said the delay in a consumption tax increase would do little to foster economic growth.
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"The reality is that PM Abe faces a monumental task to try to engineer a sustainable upturn in Japanese economic growth. The Japanese economic outlook remains bleak, faced with the highest government debt to GDP (gross domestic product) ratio in the OECD, ageing demographics and a declining population," Rajiv Biswas, Asia-Pacific chief economist at IHS, told CNBC via email.