By Leika Kihara

TOKYO Japan's economy likely shrank in the July-September period, the first contraction in four quarters, according to a Reuters poll, heightening challenges for the central bank's exit from ultra-loose monetary policy.

Gross domestic product (GDP) in the world's third-largest economy was projected to have eased by an annualised 0.6% in the third quarter, the poll showed, after expanding 4.8% in April-June.

On a quarter-on-quarter basis, the economy fell 0.1% in July-September, the poll showed.

The weak reading likely reflects soft consumption and exports, suggesting that accelerating inflation and weakening demand in China are taking a toll on a fragile economic recovery.

"Consumption is recovering as a trend as economic activity normalises from the COVID-19 pandemic era," analysts at Dai-ichi Life Research Institute said.

"But the recovery in consumption will likely remain moderate due to the pain from rising inflation," they said.

Consumption probably rose just 0.2% in July-September from the previous quarter after slumping 0.6% in the April-June period, the poll showed.

Capital expenditure rose 0.3% in the third quarter after declining 1.0% in April-June, according to the poll.

External demand shaved 0.1 percentage point off GDP in July-September after contributing 1.8 percentage points in April-June, the poll showed.

The government will release the preliminary July-September GDP data at 8:50 a.m. on Nov. 15 (2350 GMT Nov. 14).

With inflation exceeding its 2% target for more than a year due largely to rising raw material costs, many analysts expect the Bank of Japan to phase out its massive stimulus next year.

But Governor Kazuo Ueda has stressed the need to keep monetary policy ultra-loose until the economy is strong enough to generate solid wage growth that will keep inflation sustainably around its 2% target.

(Reporting by Leika Kihara; Editing by Jacqueline Wong)