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Japan's growth chugs along, thanks to consumers

Shoppers and tourists walk through a shopping street in front of the Sensoji temple in Tokyo, Japan, on Thursday, Aug. 8, 2013.
Tomohiro Ohsumi | Bloomberg | Getty Images
Shoppers and tourists walk through a shopping street in front of the Sensoji temple in Tokyo, Japan, on Thursday, Aug. 8, 2013.

The rapid growth spurt that Japan experienced in the first quarter of this year likely continued into the second quarter on strong consumer spending even as the pace of recovery the world's third largest economy slowed, economists tell CNBC.

Expectations for gross domestic product (GDP) growth from April to June due out on Monday range from as high as 3.9 percent to as low as 2.3 percent on an annual basis. That compares to 4.1 percent growth in the first quarter - the fastest pace in a year.

(Read more: Japan revises first quarter growth figures upwards)

But all economists agree that Japan's third consecutive quarter of expansion was driven by "healthy" consumer spending as a result of Prime Minister Shinzo Abe's radical policies to overhaul the economy, known as "Abenomics."

"It will be a really well-balanced, sound growth since the first quarter this year and we think that will continue mainly if you see domestic demand, household consumption keep achieving the stable expansion," Tokyo-based Long Hanhua Wang, Japan economist at RBS said on Friday.

Private consumption, which accounts for about 60 percent of Japan's economy, is the most important component of GDP, according to Wang, who expects this segment grow 0.7 percent in the second quarter from the previous quarter's 0.9 percent growth.

"So, still relatively high growth and that is reflected by the improvement in consumer confidence - another impact of Abenomics," Wang said.

(Read more: Japan consumers haven't been this confident in 7 years)

Nomura economists backed that view, saying that after the Bank of Japan (BOJ) introduced monetary easing in early April, the yen weakened and share prices rose through mid-May, boosting consumer sentiment.

"Although consumer spending may have lost some momentum recently following the fall on equity markets from end-May, with all-Japan department store sales for June showing strong growth of 3.9 percent month on month, the underlying tone of consumer spending is unlikely to have changed," Nomura said in a note.

Will the momentum continue?

Government data on Friday, however, showed that Japan's consumer confidence fell in July for a second consecutive month to 43.6 points from 44.3 in June, as people turned more cautious on the economy due to a slow improvement in wages and rising prices.

Wang said he does expect third quarter growth to be lower as domestic demand "disappears," but economic growth should bounce back in the fourth quarter.

"In the third quarter there will be lower growth, and we currently expect 1.6 percent annual growth, but in the fourth quarter we think the Japanese economy will see a certain last minute demand before the consumption tax hike," Wang said.

Japan is set to hike its sales tax next April to 8 percent from 5 percent, and then to 10 percent in October 2015, in an attempt to get a handle on its public debt, which is more than twice the size of its $5 trillion economy.

(Read more: Is consumption tax hike the 'wrong policy' for Japan?)

Yoshito Sakakibara, executive director of investment research at JP Morgan Asset Management, said "reasonably good" GDP numbers wouldn't be enough for the government to pull back on the unpopular sales tax plans.

"That kind of decision would give the impression that Japan would never ever be able to raise taxes," Sakakibara said. "I guess what's best is to sustain a tax hike as scheduled, but at the same time, do a large fiscal stimulus package to offset the negative impact from the tax hike."

—By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu

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