The data poses a challenge for Prime Minister Naoto Kan's government, which must balance Japan's uncertain economic reality with an agenda that has placed cutting the industrialised world's biggest public debt at its core.

Shipments of cars, gadgets and components have been crucial in offsetting a weaker demand picture back home, but concern is mounting that Beijing's efforts to cool China's economy and doubts over eurozone and U.S. demand may hit Japan.

The planned expiry of government incentives to purchase cars may also weigh on production for the domestic market as the overseas climate worsens, analysts say. Incentives to buy energy-efficient vehicles are due to end in September.

"Clearly, the recovery has slowed down, particularly since the January-March quarter," said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo.

"We are seeing exports gradually become more sluggish, made worse by the receding effects of stimulus programs."

Unemployment rose to 5.3 percent in June, the highest level since November and missing market expectations of 5.1 percent, in an illustration of the headwinds faced by the world's second-largest economy.

And industrial output surprised the market by falling 1.5 percent in June from the previous month, missing expectations of a 0.l percent rise.

"With production turning softer, the general recovery will possibly weaken toward the end of the year," said Yasuo Yamamoto, senior economist at Mizuho Research Institute.

Some of Japan's biggest companies recently posted strong quarterly profits as demand picks up from the lows hit during the financial crisis, but economic uncertainty has led to a strong yen, threatening future earnings, analysts say.

"A strong yen could pressure exports in the future," said Shinke. "And if slowdown worries over the US economy increase, this may lead to slowdown of exports, which would weigh on production."