Japan's economy shrank less than expected in the second quarter although capital expenditure fell more than originally forecast, revised data showed.

The data will keep Japanese policymakers under pressure to do more to energise the fragile recovery. 

Analysts expect any rebound in the third quarter growth to be feeble as factory output unexpectedly fell in July and China's slowdown dampened prospects for a solid recovery in exports.  

The world's third-largest economy shrank an annualised 1.2% in the three months from April to June, less than the initial estimate of a 1.6% contraction, Cabinet Office data showed today. 

Capital expenditure fell 0.9% from the previous quarter, more than a preliminary 0.1% drop, clouding the outlook for the world's third-largest economy. 

But the weakness in capital spending was offset by gains in inventories, which contribute to economic growth. 

Inventory gains added 0.3 percentage point to growth, more than a preliminary 0.1% contribution, the data showed. 

Japanese policymakers are clinging to the hope that companies will use the record profits they earned from a weak yen and lower energy costs to boost wages and investment, generating a positive cycle of rising income and higher spending.

But a recent batch of soft data has cast doubt on such optimism and the Bank of Japan's argument that a steady recovery will help accelerate inflation to its 2% target by around September next year.

The Bank of Japan is expected to offer a bleaker assessment on overseas economies at this month's rate review, sources say, although many in the bank prefer to hold off on expanding stimulus for now.