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Here's the missing piece in Japan's growth puzzle

Chad Ehlers | Photographer's Choice | Getty Images

Japan's disappointing growth figures for the second quarter highlight the absence of a factor crucial to a sustained revival in the world's third largest economy: a turnaround in corporate investment.

"Private investment and inventories are contributing negatively to GDP - this implies that Abenomics has to be refocused towards stimulating business activity by corporates," Junko Nishioka, chief Japan economist, RBS Securities told CNBC on Monday.

The economy grew 0.6 percent quarter on quarter in the April to June period, lower than expectations for 0.9 percent growth. The large miss was driven by an unexpected decline in capital expenditure, which fell 0.1 percent, compared with forecasts for a rise of 0.7 percent, and a reduction in private sector inventories. Inventories subtracted 0.3 percent percentage point to growth.

(Read more: Japan misses growth forecast in the second quarter)

"Businesses are still in the process of reducing their inventories, which means there is still not enough external demand to invest in production," said Harumi Taguchi, principal economist at IHS.

Yet economists say the underlying growth momentum in the economy is still intact, pointing to strong consumer spending helped by the rise in stock prices over the past nine months and an increase in summer bonuses. Private consumption rose 0.8 percent in the second quarter from the previous three months, beating estimates for a 0.5 percent rise.

"Consumer spending will continue to be solid as people will rush to buy goods ahead of the consumption tax increase," said Taguchi. The consumption tax hike is scheduled for April next year.

(Read more: Japan's growth chugs along, thanks to consumers)

Weaker growth has fueled a debate over whether the government will delay the hike over fears of stalling the economic recovery. But according to Masayuki Kichikawa, chief Japan economist at Bank of America Merrill Lynch, the sales tax hike will likely proceed as planned next April, saying that the growth data isn't all that bad.

"I still expect the government to hike the consumption tax in April. Before the GDP release, I assigned an 80 percent probability to this happening, after today's data it is a bit lower."

In addition, going forward economic activity will also be supported by public investment in areas such as infrastructure, said experts. In February, the Japanese parliament passed a 13.1 trillion yen supplementary budget aimed at supporting growth.

(Read more: Why the Bank of Japan is right to stay 'passive')

"The supplementary budget which was enacted will have a favorable impact on growth up until the first quarter of 2014," said Tomo Kinoshita, chief Japan economist Japan at Nomura.

Kinoshita said that the increase in public works spending in June has not been fully accounted for in Monday's GDP release, adding this could lead to a sizable upward revision to the data next month.

"Going forward, we think Japan's economy is on track. One concern is private investment, but we understand corporate sentiment has improved significantly. We should see positive private investment growth from the third quarter onwards," he said.

Kinoshita expects growth in the third quarter to come in between 2-3 percent in annualized terms.

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

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