Japan's economy rebounded from an earthquake-triggered recession in the third quarter by expanding 1.5 percent, a pace that is likely to slow down, however, as a strong yen and weak global growth darken the outlook.

The growth -- the fastest among major industrial nations -- was fueled by robust exports and consumption after companies restored supply chains wrecked by the March earthquake and tsunami, bringing output and overseas sales to pre-disaster levels.

On an annualised basis, the economy expanded 6.0 percent. The growth figures were in line with market expectations and came after three straight quarters of contraction.

But just as the world's third-biggest economy has emerged from recession it faces new headwinds from the euro zone debt crisis, a fresh shock to supply chains from the Thai floods and the strong yen, which has blazed a trail of successive record highs against the dollar.

The situation surrounding Japan's economy is increasingly severe due to weakening global economic recovery, effects of Thai floods and rapid yen rises, Economics Minister Motohisa Furukawa told reporters.

We'll continue to watch risks to the economy.

With the economic bounce tailing off, the onus is now on public spending in the nation's biggest rebuilding effort since World War II to sustain the recovery.

A 12.1 trillion yen ($157 billion) supplementary budget is now in parliament and the government hopes it will be passed by the end of this month.

In the much longer term, Prime Minister Yoshihiko Noda's government hopes a U.S.-led effort to forge an Asia Pacific free-trade pact will help lift the country's economic growth, which has largely stagnated since a property bubble burst in the late 1980s.

SLOWDOWN AHEAD

Economists polled by Reuters earlier this month saw Japan's economic growth slowing down to 0.5 percent this quarter.

Some said the economy may even shrink again as floods in Thailand -- a major production base for Japanese manufacturers -- disrupt production and as emerging economies cool.

Looking further ahead, public works spending is likely to start rising as reconstruction work gathers pace and this will contribute to GDP, said Yasuo Yamamoto, senior economist at Mizuho Research Institute in Tokyo.

However, external demand isn't likely to contribute much to Japan's growth in the future due to Europe's problems.

Net exports contributed 0.4 percentage point to GDP growth in the third quarter, the first positive contribution in five quarters, thanks to companies' rebuilding efforts following the earthquake and tsunami.

Private consumption, which makes up about 60 percent of economic activity, grew a stronger-than-expected 1.0 percent, lifted by a pick up in automobile sales as supply bottlenecks eased.

Corporate capital spending was up 1.1 percent in line with forecast.

While reconstruction after the disaster is expected to support economic growth, the corporate mood is less optimistic.

A Reuters Tankan survey and machinery orders data last week showed companies were pessimistic about the outlook for the coming months.

Manufacturers forecast that core machinery orders would fall in the fourth quarter after three straight quarter of rises.

A Reuters Tankan survey, which mirrors the Bank of Japan's tankan report, showed sentiment worsened in November for the second straight month and companies were pessimistic about the outlook for the next three months.

One factor weighing on corporate sentiment is the strength of the yen, which hit a record high against the dollar of 75.31 late in October prompting authorities to intervene in markets to sell the currency.

Several car makers and electronics firms have warned they might be forced to move more production abroad to cope with the currency.

Japanese authorities sold an estimated record 7.7 trillion yen ($100 billion) in the intervention and the Bank of Japan eased monetary policy last month, steps that have had only a short-lived impact.

The central bank meets again Tuesday and Wednesday and is expected to leave policy unchanged this time, saving up its increasingly limited policy arsenal in case Europe's debt crisis turns into a global shock similar to that sparked by Lehman Brothers' collapse in 2008.

Some people think the BOJ can weaken the yen with aggressive monetary easing, but I think this is a dream. It didn't happen when the BOJ did it before, so I see no reason why it would happen now, said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co.

Japan told its APEC partners this weekend that it was ready to join talks on efforts to forge an Asia-Pacific trade pact.

As a trading country that has build its prosperity of today, we must take advantage of growth in the Asia-Pacific region, Noda said in Tokyo before leaving for the summit in Hawaii.

The Asia-Pacific leaders hope the pact will help boost growth and shield their economies in the future from economic shocks, such as the euro zone debt crisis.

(Additional reporting by Stanley White, Kaori Kaneko and Lisa Twaronite; Writing by Rie Ishiguro and Tomasz Janowski; Editing by Edwina Gibbs and Neil Fullick)

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