Japan has reported continuing economic recovery in the three months to September, but a fall in exports due to weak global demand have raised fears it could fall back into recession.

Gross domestic product (GDP) rose 0.7%, which was just above analysts expectations, after 1% growth in the quarter to June, as consumer spending offset sluggish exports and a drop in corporate investment.

"If the current pace continues it will exceed the government's forecast for this fiscal year," Prime Minister Junichiro Koizumi said.

"It means not everything is bad."

On an annualised basis, the world's second-biggest economy grew by 3% in the July to September period, the third straight quarter of expansion.

On Tuesday the government downgraded its economic outlook for the first time in a year and set a zero percent growth target for the year to March.

Export weakness

The data failed to lift the Nikkei 225 share index off 19-year-lows as other news showed signs of economic weakness.

Exports fell for fourth straight month in September, largely because of slow growth in the US economy.

Factory output fell for the first time in three months in September because of the falling exports.

Foreign demand for Japanese goods, which fuelled the economic recovery earlier this year, rose just 0.5% compared with a 5.9% in the June quarter.

Chief Cabinet Secretary Yasuo Fukuda said a surprise 0.9% fall in capital expenditure, after a 0.2% rise in the previous quarter, was a cause for concern.

Big spenders?

Consumer spending, which accounts for 60% of GDP, rose 0.8% in the quarter from 0.5% in the quarter to June, offering a glimmer of hope despite record unemployment.

But a sharp fall in workers' winter bonuses is expected, which could cut spending again in the months ahead.

A Bank of Japan interest rate meeting is due next week, but Deputy Governor Sakuya Fujiwara said monetary policy would have little effect given the country's economic troubles especially in the banking sector.