Tokyo, Dec 22 (IANS): Japan's economy, the third largest in the world, would grow about 1.7 percent in real terms in fiscal 2016 starting April, according to Tuesday's government forecast.

Japan's gross domestic product, in nominal terms, will likely expand around 3.1 percent 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 Inc. and will be the highest level in 19 years since fiscal 1997, according to the report.

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

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 percent 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 percent for the reporting fiscal year.

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

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

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.