Japan's economy shrank less than expected in the April-June quarter, latest data showed, fuelling hopes that its recovery from the March 11 quake and tsunami disasters is on track.
Finance Minister Yoshihiko Noda on Monday said Asia's second-biggest economy looks likely to grow again in the July-September quarter, although he warned of the risk posed by the strong yen, which hurts Japan's exporters.
The Cabinet Office said Japan's economy shrank an annualised 1.3 percent in the first full quarter since the nation's worst post-war disaster -- beating bleak market expectations of a 2.7-percent contraction.
The figures highlight that Japan's economy has started to bounce back from the calamity, which killed more than 20,000 people, wiped out entire towns along the Pacific coast and sparked a nuclear emergency.
"It was negative growth, but not bad data," said Mitsumaru Kumagai, chief economist at the Daiwa Institute of Research. "Our basic expectation now is to see gradual growth on the back of reconstruction demand."
On-quarter, Japan's gross domestic product (GDP) shrank by 0.3 percent in April-June, after a 0.9-percent contraction in the January-March period and shrinkage of 0.6 percent in the previous quarter.
Exports plunged by an annualised 18.1 percent in the second quarter, when tsunami damage to factories in Japan's northeast still hobbled supply chains, especially in the crucial auto and electronics sectors.
As the scale of the disaster weighed on the nation, private consumer spending, nearly two-thirds of Japan's GDP, fell 0.1 percent on-quarter.
However, rebuilding efforts also stimulated the economy. Government consumption rose 0.5 percent and public investment increased 3.0 percent due to relief and reconstruction projects for the quake-hit areas.
Corporate investment grew by 0.2 percent, said the data, which follow recent figures showing increases in industrial production and machinery orders, a key indicator of capital spending.
Kumagai said that "despite the damage done to supply chains, consumption of durable goods, such as televisions and air-conditioners, did not fall," he said. "Exports did fall, but not as sharply as expected.
"For July-September, it is reasonable to assume a return to growth."
Finance Minister Noda also said: "There is a strong possibility the economy will return to growth in the July-September period.
"But there are factors posing downside risks to the economy, such as the yen's strength," he added at a news conference.
Recent global market turmoil sparked by the eurozone debt crisis and the uncertain US economic outlook has prompted investors to flock to the yen, which is considered a safe-haven currency.
The heavy buying has sent the yen soaring to near its post-war high of 76.25 to the dollar -- a trend that hits Japan's export sector by making its goods less competitive abroad and eroding repatriated overseas profits.
The yen traded at 76.83 to the dollar amid thin trade in Tokyo in the afternoon, from 76.76 yen to the greenback late Friday in New York.
Japan's government intervened in the forex market earlier this month in a bid to tame the yen's rise, and has signalled it is ready to do so again, as businesses have threatened to move factories abroad.
Companies have also warned of the risk of electricity shortfalls and higher prices as Japan goes through a summertime electricity saving campaign sparked by the Fukushima nuclear crisis.
The accident has fuelled anti-nuclear sentiment among the Japanese public and kept many reactors offline after scheduled safety inspections as many host communities have been unwilling to approve restarts.
Only 15 of Japan's 54 nuclear reactors are now operating, with more due to cease operations soon for regular checks.