Japan's economy set to grow at 1.7% in 2016

However, the government expects growth in current fiscal at 1.2%, a downgrade from its earlier estimate of 1.5%

Japan's economy, the third largest in the world, would grow about 1.7% in real terms in fiscal year 2016 starting April, according to the government forecast.

Japan's gross domestic product (GDP), in nominal terms, will likely expand around 3.1% in the next fiscal year to around $4.3 trillion, Xinhua cited the forecast, led by recovering consumer spending and capital investment, as reporting on Tuesday.

The projected GDP level will surpass the level before the financial crisis triggered by the collapse of investment bank Lehman Brothers Holdings and will be the highest level in 19 years since fiscal 1997, according to the report.

The planned consumption tax hike from 8% to 10% in April 2017 would help the overall growth increase by around 0.3% due to demand increase ahead of the tax hike.

The government said that the Japanese economy is expected to grow 1.2% in the current fiscal year, downgraded from a previous estimate of 1.5%.

The recently compiled extra budget for the improvement of welfare services and farm sector's competitiveness would also boost the country's GDP by about 0.4 % in fiscal 2016, according to the projection.

However, the government forecast was more optimistic than that of the Bank of Japan, the central bank here, which estimated real GDP growth of 1.4% for the reporting fiscal year.

Affected by the declining crude oil prices, the government also said that inflation rate would rise to 1.2% in fiscal 2016, a read short of the 2% target raised by the central bank to fight against Japan's prolonged deflation.

The government also warned that capital outflows from emerging markets would be downside risks after the US Federal Reserve has decided to raise interest rates.