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Why Japan's economy is stuck in 'no man's land'

As poor economic data rattles faith in Abenomics following the April consumption tax hike, one analyst told CNBC that uncertainty over the outlook for Japan's economy will linger for some time.

"With the consumption tax, we're not done with this… as the government is poised to take it from 8 to 10 percent next October," Paul Sheard, chief global economist at Standard & Poor's Ratings Services told CNBC Asia's "Squawk Box."

"So if they go ahead with that we're still going to be - for the next year to year and a half - in this no man's land of not knowing whether what [Bank of Japan Governor Haruhiko] Kuroda is doing is successful," he added.

Read More Japan inflation rises in July but remains short of BOJ target

Japanese household spending fell 5.9 percent on year in July, worse than expectations for a 3 percent decline, data released Friday showed. Industrial output rose 0.2 percent on month, below expectations for a 1.0 percent rise.

The data add to a series of sub-par economic readings as the effects of the government's sales tax to 8 percent from 5 percent in April drag the economy, fueling uncertainty over the effectiveness of Abenomics – Prime Minister Shinzo Abe's plan to boost Japan's long-moribund economy.

Fiona Goodall / Stringer | Getty Images | Getty Images

Second quarter growth data released in August showed the Japanese economy shrank an annualized 6.8 percent, the largest contraction since the first quarter of 2011 when the economy was hit by the impact of the March 2011 earthquake and tsunami.

Have faith

Some economists are optimistic that the fog surrounding Abenomics will soon clear.

"Despite [Friday's] weaker-than-expected data I'm still optimistic about growth prospect for the second half of the year," said Junko Nishioka, chief economist for Japan markets at the Royal Bank of Scotland.

The continued recovery in the labor market and the government's proactive stance of spending on public works are encouraging signs, Nishioka said.

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Japan's jobs-to-applicants ratio held steady at 1.10 in July after rising to that level in June for the first time June 1992, data released Friday showed.

More stimulus?

Whether or not the central bank can achieve its key inflation target without additional stimulus is questionable, however.

Nationwide core consumer prices rose 3.3 percent in July, in line with forecasts, Friday's data showed. However, when excluding the effect of the April tax hike core inflation stood at 1.3 percent, below the 2 percent inflation target that the Bank of Japan (BOJ) pledged to meet sometime next year.

"Spare capacity widened again last quarter, and may settle at levels consistent with 1 percent [inflation] rather than 2 percent over the next year or so," said Marcel Thieliant, Japan economist at Capital Economics. "What's more, the exchange rate has been broadly stable lately over the past year, so the boost from import prices is now fading."

"We doubt that the 2 percent inflation target will be reached without additional stimulus," he said.

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"Assuming that Bank of Japan has expanded its policy duration to the next fiscal year, I think 2 percent inflation during the period is achievable," Royal Bank of Scotland's Nishioka added.

The Bank of Japan is will meet this week but most analysts do not expect further monetary stimulus until October.

Contact Asia Economy

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