Japan's exports rose in June and the pace of annual declines slowed, bringing the trade balance back into surplus as factory output and sales steadily recover from the March 11 earthquake, tsunami and nuclear meltdown.

Japan's import growth also slowed, signaling that its trade patterns are returning to normal following the natural disaster and adding to evidence that the world's third largest economy is recovering from its worst crisis since World War Two.

Exports jumped 5.4 percent from May and were down 1.6 percent from June 2010, less than a median forecast for a 4.1 percent annual decline, Ministry of Finance data showed on Thursday.

The numbers back the Bank of Japan's forecast that the economy can resume growth later this year after a post-quake slump, but a strong yen, slowing China and debt risk in Europe and the United States cloud the outlook for overseas demand.

Exports could continue to recover in July and August, but after that things could be difficult if the yen continues to strengthen and overseas economies slow more, said Yasuo Yamamoto, senior economist at Mizuho Research Institute.

The BOJ can afford to wait on policy, but they do have to be careful about the yen and send a message that they are willing to purchase more assets if it rises.

The dollar hit a four-month low of 78.45 yen last week on worries whether U.S. politicians can agree to raise the federal debt ceiling before a looming August 2 deadline. It was trading at around 78.70 yen on Thursday.

Auto exports significantly improved in June as manufacturers made further progress in mending supply chains ripped apart by the disaster and bringing production back to pre-quake levels.

Auto shipments dipped 12.5 percent in June from a year earlier, but that marked a swift recovery from a 38.9 percent slump in May and a 67.0 percent drop in April, the data showed.

Imports rose 9.8 percent in the year to June, less than the median estimate for an 11.0 percent annual rise.

The nation's imports of crude oil and liquefied natural gas (LNG) rose due to higher oil prices and a suspension of nuclear reactors by several utilities that boosted demand for LNG.

The issue is the next fiscal year as there is a chance that all the nuclear power reactors in Japan may shut down, which could weigh on the nation's exports, said Yoshimasa Maruyama, chief economist at Itochu Economic Research Institute.

Japan's trade balance swung back to a surplus of 70.7 billion yen ($896 million) after two deficits, compared with the median forecast for a deficit of 165.1 billion yen.

Shipments to China rose an annual 1.2 percent, the first increase in three months, while those to the United States fell 6.1 percent.

However, investors are worried that China's buoyant growth which has helped Asia recover from the 2008-2009 global financial crisis, may falter under the burden of bad local government debt and efforts to rein in rising inflation.

($1 = 78.865 Japanese Yen)

(Writing by Rie Ishiguro; Editing by Tomasz Janowski)

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