Japan's economy contracted at a slower pace than expected in the second quarter as output and exports recovered from the deadly earthquake in March, but a soaring yen and slowing global growth cloud the outlook for an economy emerging from recession.
Analysts expect the economy to rebound in July-September, probably at the fastest rate among major industrialised nations, as companies made faster-than-expected progress in restoring supply chains hit by the March quake. But growing risks to this scenario could strain a depleted arsenal of policy tools.
Worries that Europe's sovereign debt woes are sparking another global crisis could rob Japan of much-needed export demand, increasing the chance of further yen-selling intervention and monetary easing to secure economic recovery.
Gross domestic product shrank 0.3 percent in the second quarter, less than a median forecast for a 0.7 percent contraction and a 0.9 percent contraction in January-March.
On an annualised basis, the economy contracted 1.3 percent against a median forecast of a 2.6 percent annualised decline. The United States posted growth of 1.3 percent in the same quarter.
Private consumption, which makes up around 60 percent of the economy, fell 0.1 percent in April-June as some households cut back on spending after a large earthquake, tsunami and nuclear meltdown in March.
Corporate capital spending rose 0.2 percent against the market forecast of a 0.5 percent increase.
External demand, or net exports, pushed down GDP by 0.8 percentage point, as the disaster prevented some Japanese manufacturers from shipping goods abroad.
Japan intervened in the currency market and eased monetary policy earlier this month, aiming to curb a yen rise near record highs that threatened to derail the export-reliant economy's recovery from the earthquake and tsunami.
Analysts expect the economy to emerge from recession in July-September, after three straight quarters of contraction, as manufacturers shake off supply constraints and reconstruction demand kicks in.
But the soaring yen and slowing global growth pose risks to the BOJ's forecast that the economy will resume a moderate recovery in autumn.
(Additional reporting by Leika Kihara and Kaori Kaneko, writing by Leika Kihara, editing by Chris Gallagher)