The key to recovery will be if firms and consumers keep spending

An unexpected rise in machinery orders in June signalled that firms were confident enough about the future to buy new equipment.

There had been fears that higher rates would hurt corporate spending levels.

Domestic demand is a key factor in ensuring that Japan emerges from a long period of poor growth and deflation.

Global interest rates have been rising, fanning fears that the world economy, and the US in particular, may slow down in coming months.

According to government figures, Japan's machinery orders jumped by 8.5% in June from the previous month, more than analysts had forecast.

"The figures show that companies are still keen to invest despite worries about the impact of a US economic slowdown on the domestic economy towards the end of the year," said Seiji Adachi, an analyst at Deutsche Securities.

"It's a sign that companies believe the recovery is for real and that the economy is set for a long expansion," he added.

Balancing act

While the comments are upbeat, there are concerns that the Japanese economy may not have the momentum to power comfortably through the current choppy waters of the world economy.

One of the main drivers behind global inflation has been surging oil prices, and petrol prices in Japan have also climbed to record levels.

With consumers and companies having to pay more for transport, some analysts are worried that the Bank of Japan may have acted too quickly in raising its borrowing costs, now at 0.25%.

Japan is hoping to emerge from some dark economic times

Many observers have predicted that the recent, long-running period of low global interest rates has come to an end.

Even though the US Federal Reserve decided to leave its main borrowing rate unchanged at 5.25% on Tuesday, it hinted that it may increase it again should inflation pick up.

The European Central Bank and the Bank of England last week raised interest rates, and analysts have predicted that more hikes could be on the cards.

But a majority of analysts predict that Japanese interest rates are unlikely to rise more than once again this year.

These views and Wednesday's economic data may help ease Japanese fears for the moment, but analysts said that while Japan's economic recovery was ticking over it was still finely balanced.