Japan's economy shrank in the second quarter at a faster pace than initially reported as companies held back on capital expenditure due to worries about a rising yen and faltering global growth.

Economists say Japan is likely to resume growing in the third quarter after three consecutive quarters of contraction, boosted by a rapid recovery in supply chains following the March 11 earthquake, but the outlook further ahead looks increasingly in doubt.

Other data pointing to weak business investment and a dip in exports increasingly suggest Japan will not be able to rely much on external demand. This could pressure the government to speed up reconstruction spending and lean on the central bank to weaken the yen by easing policy further.

"As capital spending is unlikely to grow as strongly as previously thought, a rebound in GDP in July-September may be smaller than initially thought although gradual recovery is still expected," said Yuichi Kodama, economist at Meiji Yasuda Life Insurance in Tokyo.

"There are also increased chances of the yen's appreciation in the coming month due to the Federal Reserve's expected easing and the latest Swiss move. Bank of Japan may be prompted by market moves, rather than the economy's performance, to ease its policy."

Gross domestic product shrank a revised 0.5 per cent in the second quarter, bang in line with the median market forecast and compared with the initially reported 0.3pc contraction, Cabinet Office data showed yesterday.

On an annualised basis, the economy contracted 2.1pc, against a 2.2pc fall expected by economists.

Capital expenditure fell a revised 0.9pc, compared with an initially reported 0.2pc rise and a 1.9pc fall expected by economists.-Reuters