Japan's economy grew stronger than expected in the third quarter, as a rise in consumer spending offset weakening exports and a strong yen.

Showing a growth for four straight quarters, real gross domestic product (GDP) in the world’ third largest economy expanded 0.9 percent in July-September compared with the previous quarter, the Cabinet Office said on Monday.

Markets had expected the economy to grow 0.6 percent in the third quarter.

However, the economy grew at an annualized rate of 3.9 percent in the third quarter.

“Japan's GDP growth in Q3 was comfortably above consensus, but the markets are right to be worried about its sustainability. We continue to expect the economy to contract again in Q4 as consumer spending drops back, exports struggle, and the recovery in investment remains sluggish,” said a Capital Economics note.

Bulk of the growth in Q3 was driven by consumer spending which went up 1.1 percent quarter-on-quarter.

“This is not as good as it looks. For a start, it is partly a bounce-back from the weakness in Q2, when spending rose just 0.1 percent,” Capital Economics said.

In the third quarter, the growth was temporarily boosted by an increase in sales of eco-friendly vehicles as the government incentives expired at the end of the quarter. High temperatures increased the sales of summer drinks and clothes, and tobacco sales rose ahead of an Oct. 1 tax hike.

“We would not dismiss the buoyancy of consumer spending completely: the recovery in employment incomes means that spending would probably have been firm anyway. Nonetheless, we already know that spending fell back sharply in September and the leading indicators for the labour market have been weakening too,” said Capital Economics.

However, investment spending remained sluggish. Non-residential (business capital) investment grew at the rate of 0.8 percent against 1.8 percent in the previous quarter.

Residential investment (house building), which accounts for a small share in Japan’s economy, rose by 1.3 percent in Q3 compared with a contraction of 0.8 percent in the second quarter.

Exports also grew slowly at the rate of 2.4 percent amid slowing global demand and a strong yen continued to hurt the exporters.

“However, as Japan's exporters have typically not increased foreign currency prices in response, the hit from the strong yen has mainly come in the form of lower profits and less investment rather than a fall in export volumes,” said Capital Economics.

Amid growing concerns over the economic recovery, Prime Minister Naoto Kan's Cabinet approved last month $57.8 billion in new stimulus spending. The package extends financial support for small businesses and local economies in Japan.

“The scope for government spending or subsidies to support the economy further is obviously limited by the dire fiscal position. There is another modest stimulus package in the pipeline, but it will be implemented too late to rescue growth in Q4,” Capital Economics said.

Economists at Capital Economics expect the GDP growth to slow to 0.2 percent in the fourth quarter.

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