The improvement stemmed mainly from strength in car production and construction machinery
Japan's government retained its view that the economy is recovering at a moderate pace, while saying that weakness continued to centre on exports, according to a monthly economic report for July released by the Cabinet Office on Tuesday.
Risks to the outlook posed by lacklustre overseas demand could add to pressure on the government to boost spending in order to counter a potential blow to demand from a scheduled sales tax hike in October.
On the positive side, the government lifted its assessment of industrial output for the first time in more than a year-and-a-half, raising it to flat from weak.
The improvement stemmed mainly from strength in car production and construction machinery, an official said, adding the government remained cautious over the outlook for industry.
"(The production of) transport goods continued to increase, while the decline in machinery production could be seen easing a little," he said.
Japan's industrial output rose at the fastest pace in more than a year in May due to higher car production, data showed last month, suggesting that growth is holding up despite fears that the US-China trade war was hurting demand.
But exports dropped for a seventh straight month in June, falling 6.7% from a year earlier, data showed on Thursday, denting policymakers' hopes that domestic demand will help offset intensifying external strains.
Japan's economy expanded an annualised 2.2% in the first quarter due to robust capital spending, but many analysts predict growth will slow in the coming months due to increasing external pressures and the risk posed by the planned nationwide sales tax hike.
The government revised down its view for the economy twice this year, in March and May.