Japan's economy contracted at a slower pace than expected in the second quarter as output and exports recovered from the devastating earthquake in March, but a soaring yen and slowing global growth clouds the outlook.

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KEY POINTS:

-- Gross domestic product shrank 0.3 percent in the second quarter, compared with a median forecast for a 0.7 percent contraction. On an annualized basis, the economy contracted 1.3 percent against a median forecast of a 2.6 percent annualized decline.

-- Net exports shaved 0.8 percentage point off GDP, against the median estimate that they would trim 0.9 percentage point from the figure.

-- Private consumption, which accounts for about 60 percent of the economy, fell 0.1 percent against the median forecast of a 0.5 percent decline.

-- Corporate capital spending rose 0.2 percent against the market forecast of a 0.5 percent increase.

COMMENTARY:

NAOKI MURAKAMI, CHIEF ECONOMIST, MONEX SECURITIES, TOKYO

The impression from the data is that capex was relatively strong, and this could be a reflection of firms generating their own electricity and moving operations to the Kansai region.

The GDP headline figure was better than expected but it still does not change the fact that it was negative growth.

The domestic economy is recovery relatively well, for example manufacturing is steady, but we see growth remaining sluggish with exports expected to become a drag on the economy toward the year's end due to the global economic slowdown.

SATORU OGASAWARA, ECONOMIST, CREDIT SUISSE, TOKYO

It seems the level of productivity has been normalising quite quickly (after the quake) and while GDP contracted for the third straight quarter, today's data suggests GDP will rebound into positive territory in the July-September period, with reconstruction demand kicking in during the October-December period (providing further) support.

If the global economy picks up (in the second half) and demand for Japan's products remains solid, we think the external sector may not be hurt very much, but a worse-than-expected slowdown (globally) could lead to a delay in Japan's economic recovery, even with the pick-up from reconstruction efforts.

HARUMI TAGUCHI, HEAD OF INVESTMENT STRATEGY AND INFORMATION

DEPT, COSMO SECURITIES, TOKYO

The quarter-on-quarter and annualized figures were both stronger than expected. Companies accumulated more inventory than expected, while government spending related to post-quake reconstruction also contributed to growth.

Consumption is also normalising after households withheld spending in response to the quake ... But capital spending growth was within expectations. Companies remain hesitant about boosting spending because of the yen's rise, stagnating global demand and uncertainty over Japan's policy outlook.

KOYA MIYAMAE, ECONOMIST, SMBC NIKKO SECURITIES, TOKYO

Stronger than expected consumption looks to have led to the better-than-anticipated outcome.

One-off factors look to have helped consumption. For example, the switch to digital broadcasting boosted television sales and the trend toward conserving power spurred sales of appliances that use less electricity. The start of cool biz also likely helped sales of clothing.

All in all, capital spending and demand for consumer durables appear to be recovering at a quicker than expected pace after the March disasters, with cuts in power output not having such a detrimental effect so far.

The supply chains damaged by the disasters are also being fixed, and domestic factors are improving overall.

Going forward, the focus will shift to overseas factors and their impact on the economy, such as developments in the currency markets and how other economies fare.

YOSHIKIYO SHIMAMINE, CHIEF ECONOMIST, DAI-ICHI LIFE

RESEARCH INSTITUTE, TOKYO

The first impression is that it is better than expected, probably due to a quick recovery in supply chains in the auto sector that became visible after the holiday season in early May.

The scenario that Japan's economy will get on a recovery track later this year has not changed but the process could be slowed down by yen strength and financial turmoil in the U.S. and Europe.

It is possible the Bank of Japan will take additional steps to ease monetary policy so that companies can continue capital investment at home.

LINKS:

-- For the full tables, go to the Cabinet Office's web site: http://www.esri.cao.go.jp/jp/sna/sokuhou/kekka/gaiyou/main_1.pdf

BACKGROUND:

-- Japan intervened in the currency market and eased monetary policy earlier this month, aiming to curb a yen rise near record highs that is threatening to derail the export-reliant economy's recovery from the devastating March earthquake and tsunami.

-- Japan's economy is likely to emerge from recession in July-September as manufacturers shake off supply constraints and reconstruction demand kicks in, economists say.

-- But the outlook for the export-reliant economy is murky as fears the United States could slide back into recession, along with fallout from the euro zone debt crisis, have sent global stock markets tumbling since the start of August.

(Reporting by Tetsushi Kajimoto, Yuko Inoue, Leika Kihara, James Topham and Shinichi Saoshiro; Editing by Edmund Klamann)

Japan