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Could Japan fall back into recession next year?

A pedestrian holding an umbrella looks at an electronic stock board displaying the closing figure of the Nikkei 225 Stock Average outside a securities firm in Tokyo, Japan.
Tomohiro Ohsumi | Bloomberg | Getty Images
A pedestrian holding an umbrella looks at an electronic stock board displaying the closing figure of the Nikkei 225 Stock Average outside a securities firm in Tokyo, Japan.

Even before Japan can stage a convincing growth rebound, fears are already building over a sharp slowdown in the world's third largest economy, with one analyst warning of a possible recession next year.

Economic indicators published on Tuesday including weaker-than-expected industrial production and household spending for June, highlighted the fragility of the recovery.

Industrial output fell 3.3 percent in June from May, against expectations for a decline of 1.8 percent. Household spending for the month fell 2 percent month-on-month, lower than forecasts for a rise of 0.7 percent. Employment data, however, was a bright spot, with the country's jobless rate falling to 3.9 percent, the lowest since October 2008.

(Read more: Japan's sales tax debate could hit the Nikkei)

"The economy is improving. However, the big question is if Japan can continue to keep growing beyond April 2014 when consumption tax rate is hiked," said Takuji Okubo, chief economist at Japan Macro.

"The risk is that the Japanese economy could deflate when the tax rate is raised, possibly prompting the economy to enter into a recession in the second half of 2014. I fear that this downside risk is growing," Okubo said.

The consumption tax on goods and services is due to rise to 8 percent next April from the current 5 percent, and to 10 percent in 2015, under the current law. It is seen as key to helping reduce Japan's high debt burden, but there are worries that a hike too soon could derail a nascent economic recovery.

(Read more: At last, inflation in Japan is speeding up)

According to a report from the local Nikkei newspaper on Tuesday, the government plans to forecast growth of 1 percent in real gross domestic product for the fiscal year 2014 ended March 2015, from 2.8 percent in the current fiscal year, due to fiscal tightening and fading effects of economic stimulus.

Okubo says while the government is likely to unveil a stimulus package in the form of public works spending, it will be insufficient to counter the effects of fiscal tightening.

"If the Japanese economy is to keep growing in 2014, other demands will have to make up for the loss of fiscal easing. Unfortunately, I do not see a source of such compensating demand," he said.

"The private investment is starting to firm up, but I do not see it being strong enough to save the economy. The export demand offers some hope, but with the dismal outlook on Chinese economy and Europe still on the fiscal austerity, I do not think it is realistic to count on an export boom," he added.

(Read more: Weak yen not enough for Japan exporters as China slows)

Bank of Japan governor Haruhiko Kuroda has backed the sales tax increase, saying on Monday that it would not harm the economy and is needed to repair public finances.

"His comment sounds like a mere wishful thinking. In our view, the BoJ can and should do more to help stimulate the demand through lowering interest rates and driving yen lower," Okubo said.

Uncertainty over a rise in the consumption tax has weighed on the sentiment of equity investors – with the benchmark Nikkei 225 coming under pressure in the recent days. The index has declined 6.5 percent over the past week.

—By CNBC's Ansuya Harjani; Follow her on Twitter: @Ansuya_H

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