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Japan set for third-quarter blip, but won't last for long

Shubiya district, Tokyo, Japan
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Shubiya district, Tokyo, Japan

The world's third-largest economy is expected to grow at a much slower pace in the third quarter of this year, analysts say, as weaker export demand weighs on growth.

According to a Reuters poll, Japan's gross domestic product will likely rise 1.7 percent annualized rate in Q3, a marked fall from the second quarter's 3.8 percent rise, and the first-quarter's 4.1 percent rise.

The blip might not be welcomed by Japanese policy makers who late last year launched an ambitious raft of economic policies designed to drag the economy out of over a decade of deflation. 'Abenomics,' as the policies are known, has proven successful so far, helping haul the economy out of recession in 2012 posting three consecutive quarters of growth since.

(Read more: Will 2% inflation be enough for Japan?)

According to Long Hunhua Wang, Japan economist at RBS, the main factor set to drag down the economy's third quarter growth is a sharp fall in demand for exports. He forecasts net exports will fall 0.6 percent quarter on quarter in Q3, compared with a 0.3 percent quarter-on-quarter rise in the second quarter.

Royal Bank of Scotland has forecast, 2.5 percent on year for Thursday's GDP data and a 0.2 percent quarter-on-quarter rise.

"Domestic demand remains robust and there is momentum there, but overseas export demand is sluggish, and we still haven't seen a clear influence from the yen depreciation so far," he added.

Japan's domestic currency has weakened near 15 percent against the U.S. dollar this year, and traded close to the psychologically important 100 to the yen level on Wednesday at 99.53 to the dollar.

"In the past the Japanese yen depreciation has stimulated exports and increased volumes, but hasn't happened as clearly this time, mainly because overseas demand is sluggish and the Japan's competitiveness has decreased," he added.

(Read more: The verdict on Abenomics, one year on)

Another bearish factor impeding net exports is soaring imports, Wang pointed out. Japan's import bill remains stubbornly high due to the country's high energy dependency on foreign imports following the 2011 tsunami disaster. Wang added that added that robust momentum of domestic household consumption had led to the rise of imports.

Harumi Taguchi, principal economist for economics & country risk at IHS Global Insight, also pointed to a negative contribution from real exports (exports minus imports) as the main dampener on the third quarter growth figure. He forecast 1.6 percent annualized growth for the third quarter.

However, Taguchi said a lower growth number for the third quarter would likely be temporary and he expects the economy to return to strong growth in the final quarter of this year.

"I expect we will see 3.5 percent annualized q/q in Q4 and 4.7 percent in Q1 2014, mainly driven by last-minute demand before the consumption tax increase," he said, referring to the government's plan to hike the sales tax to 8 from 5 percent in April next year and to 10 percent by October 2015.

(Read more: Bank of Japan ups growth outlook; inflation target intact)

Taguchi added that exports should pick up in the coming quarters, as the weakening yen starts to take effect and increase the competitiveness of the sector.

RBS's Wang said he also expected the weaker Q3 GDP number to be a temporary blip, and said he saw growth picking up at the end of the year and early next year. RBS forecast 3.1 percent of annualized growth in the final quarter of this year.

"Last minute demand prior to the consumption tax hike will drive a pick up again in Q4 and the first two quarters of next year. Private consumption, capex, and housing investment will all increase prior to the hike," he added.

—By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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