Japan misses growth forecast in the second quarter

Akio Kon | Bloomberg | Getty Images

Japan's economy logged a third quarter of growth in the three months ending June, but the increase was much smaller than expected, heightening calls for the government to delay a controversial sales tax hike some have said who hamper the country's recovery.

The economy grew 2.6 percent on an annualized basis in the April to June quarter, lower than 3.6 percent growth forecast according to Reuters and follows the 4.1 percent growth in the first quarter, government data showed on Monday.

Quarter on quarter growth came in at 0.6 percent, versus expectations of 0.9 percent and compared to the 1 percent figure logged in the first quarter.

(Read More: Could Japan fall back into recession next year?)

The data drew mixed reaction from government officials over the plan to raise a consumption tax in April 2014.

While the adviser to Prime Minister Shinzo Abe, Koichi Hamada, said the figures showed the government was in no hurry to raise the tax and could consider delaying the measure by one year, economy minister Akira Amari described the data as "good numbers" which are supportive to the sales tax hike plan.

Japan is due to raise its sales tax in April to 8 percent from 5 percent, and to 10 percent in October 2015, in a move that will help the economy cut its fiscal debt of over 200 percent of gross domestic product (GDP). A decision is expected to be made on September 9 following the release of revised second quarter GDP figures.

(Read more: Sales tax will hurt Japan growth: IMF)

The data sent dollar-yen lower, with the currency pair slipping below 96 at one point. The Nikkei, meanwhile, fell to a six week low.

"We're definitely going to see some (dollar) yen depreciation here. It's an aspect of the fact that you're going to have some sentiment that is going to be harder for Abe to get through his increase in consumption tax," said Gavin Parry, managing director of Parry International Trading.

Still, Parry believes the disappointing GDP data is "a blip in the trend." He expects economic activity will pick up in the coming months, driven by an improvement in industrial production.

(Read more: Stocks that may do well if Japan wins 2020 Olympic bid)

Atlantis' Merner said markets shouldn't be looking at just one quarter of data, but also look ahead at "what it is going to happen this year and next year."

" I think we can be fairly optimistic, looking at the GDP breakdown," he said.

Tony Nash, managing director at IHS Consulting, said it is now crucial for Abe to step up structural reforms, also referred to as the "third arrow" of his three-pronged revitalize the economy.

"I don't see the second quarter reading as 'derailer' for Abenomics, but Abe must have more substance for third arrow soon or risk investor pushback."