(Updates with economist's comment in the fourth paragraph.) July 21 (Bloomberg) -- Japan's exports fell less than economists expected, signaling the world's third-largest economy is emerging from a slowdown after the March 11 earthquake and tsunami. Exports decreased 1.6 percent in June from a year earlier, the slowest fall in four months and following a 10.3 percent drop in May, the Finance Ministry said today. The median estimate of 27 economists surveyed by Bloomberg News was for a 4.1 percent decline. Shipments are recovering as manufacturers such as Toyota Motor Corp. restore production damaged by a record temblor. Still, export growth may be threatened by the yen's gain to a four-month high against the dollar, a U.S. economic deceleration and fallout from the European sovereign debt crisis. "The effects of economic slowdown abroad have been limited so far, and supply chain problems have been mitigated, enabling a continued recovery of exports," Masayuki Kichikawa, chief economist at Bank of America Merrill Lynch in Tokyo, said before the report. "The immediate problem is the sharp rise of the yen in the currency market, and a key issue is how the government and the Bank of Japan will respond." Japan's central bank will take "decisive" policy action when needed while watching the economy and exchange rates, Deputy Governor Hirohide Yamaguchi said yesterday. The yen's advance could become "problematic" if it becomes a trend, Finance Minister Yoshihiko Noda said last week. Yen's Strengthening The yen strengthened to a four-month high of 78.47 against the dollar on July 14, threatening to hurt exporters' earnings. Economic data so far have underscored the corporate sector's rebound from the March disaster. Industrial production rose at the fastest pace in more than 50 years in May, led by carmakers. Large companies plan to boost capital spending 4.2 percent in the fiscal year ending March 2012, more than economists forecast, the Bank of Japan's Tankan survey showed. Toyota Motor, the world's biggest carmaker, may return to unrestricted production of all models in October, two weeks earlier than previously planned, Executive Vice President Atsushi Niimi said on July 4. Komatsu Ltd., the world's second-largest construction machinery maker, said Japanese orders increased more than 30 percent in the second quarter from a year earlier, spurred by reconstruction demand, Chief Executive Officer Kunio Noji said last month. Overseas Outlook The risk for Japan's export-led recovery is a cloudy overseas outlook. Manufacturing growth slowed in China, Japan's biggest export market, while a 9.2 percent jobless rate in the U.S. and the debt crisis in Europe may constrain demand from the two regions. "There's a high chance that an economic recovery will be weaker than expected, given the high U.S. jobless rate, the European fiscal problems, and the yen's gain," Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo, said before the report. Japan's economy may grow at a 4.3 percent annual pace this quarter after contracting at 3 percent in the three months through June, according to the average forecast of 43 economists in a survey by the government-affiliated Economic Planning Association released on July 11. The economy shrank 3.5 percent in the first quarter. --With assistance from Theresa Barraclough and Minh Bui in Tokyo. Editors: Ken McCallum, Lily Nonomiya

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