But concern is mounting that Beijing's efforts to cool China's economy, together with doubts over both eurozone and US demand, may hit the Japanese economy.

"Industrial production continues to show an upward movement although it has been pausing temporarily in part," the ministry report said.

Political challenge

Companies surveyed by the ministry expected factory output to fall 0.2 per cent in July, however a 2 per cent climb is expected in August.

The jobs-to-applicants ratio also fell to 0.48, which means that there are 48 jobs available for 100 job-seeking candidates.

This data poses a challenge for Naoto Kan, the country's prime minister. His government must balance Japan's uncertain economic reality with plans to cut downthe industrialised world's biggest public debt.

Kan, the former finance minister, took over from Yukio Hatoyamain June and is the country's third prime minister in five years.

His party, the DPJ, won a landslide victory in a general election last September after promising to cut fiscal waste and focus spending on consumers.

But tables turned when the ruling coalition suffered a major blow by losing its majority in upper house elections on July 11.

Kan's ratings fellafter he launched plans to increase Japan's sales taxwhile failing to convince voters that he had a clear plan for fixing the country's economic problems.