Japan's economic growth slowed markedly in July-September, revised data showed Monday, highlighting the challenges facing Tokyo's bid to fire up the world's third-largest economy.

The once-anaemic economy had been outpacing other G7 nations in the first half of the year as a policy blitz led by Prime Minister Shinzo Abe helped push down the yen, giving a boost to exporters and sparking a stock market rally.

That had stoked optimism over Japan's prospects. But on Monday, the Cabinet Office revised down Japan's third-quarter economic growth to a final reading of 0.3 percent from an initial figure of 0.5 percent -- a sharp slowdown from 0.9 percent growth in the previous quarter.

On an annualised basis, which stretches the data across a full year, growth was 1.1 percent in the quarter against an initial reading of 1.9 percent.

A turndown in corporate capital spending was largely to blame for the downward revision, while Japan's export sector remains under pressure as Tokyo logs ballooning trade deficits.

The figures came out on the same day the government announced that the current account -- the broadest measure of its trade with the rest of the world -- saw a deficit of 127.9 billion yen in October, reversing a 420.8 billion yen surplus a year ago.

The fresh gross domestic product data means the headline-grabbing growth enjoyed the first half of the year has eased in the second half and is now well behind the US economy, which expanded at a revised 3.6 percent annualised rate in the third quarter.

Some economists predict the Japanese economy will pick up pace toward the year end, but they remain divided over whether the government's stimulus policies will cement lasting growth.

Investors largely shrugged off the data, with Tokyo's Nikkei 225 stock index up 1.85 percent by the morning break.

"Japan's economic growth will yet again accelerate into the latter half of the fiscal year on the back of the continued impact of fiscal stimulus and front-loading consumption demand due to the (sales) tax hike," Credit Agricole said.

Tokyo on Thursday approved a spending package worth almost $54 billion in a bid to offset the tax rise -- to 8.0 percent from 5.0 percent -- that comes into effect next year and which critics fear will derail Japan's budding recovery.

The stimulus is loaded with public works spending, including construction projects for the 2020 Tokyo Olympics, rebuilding coastal communities shattered by the 2011 quake-tsunami and updating the country's ageing infrastructure.

London-based Capital Economics called the package "disappointing".

"The measures focused on old-fashioned subsidies and public works which will do very little to boost competitiveness," it said.

However the tax hike is seen as crucial to battling a serious threat to Japan's prospects: a mammoth national debt.

Standing at more than twice the size of the economy, Japan has the heaviest debt burden among industrialised nations. The International Monetary Fund, among others, has been calling on Tokyo to gets its fiscal house in order.

Analysts have been warning that Abe's bold pro-growth programme -- a mix of big government spending and central bank monetary easing -- is not enough on its own without promised economic reforms.

The proposed shake-up, including loosening labour laws and signing free trade deals, is seen as key to ushering in lasting change in an economy plagued by years of deflation.

Legislators have passed a bill that paves the way for an opening up of the electricity sector, and Abe has vowed to remove some subsidies for the protected agricultural sector. But deeper reforms have so far been more talk than action.

That has raised the prospect of the Bank of Japan having to expand its already unprecedented monetary easing measures, launched in April, to give another jolt to the economy.

Critics of Abe's policy say growth so far is largely thanks to stimulus spending and the Bank of Japan's injections of vast sums into the financial system, similar to the US Federal Reserve's quantitative easing.