Separate data showed the June jobless rate edged down from a three-year high hit the previous month, although the number of available jobs per applicant fell to a more than five-year low.

Official data released on Friday showed factory output increased 2.7% in June from the previous month when it hit its lowest level since March 2009 during the financial crisis.

The rise was largely thanks to a bounce in motor vehicle production, and beat the median market forecast for a 1.2% increase in a Reuters poll of economists. Japan's economic activity has gradually resumed in recent months after the government lifted a state of emergency at the end of May.

"This comes as a relief," said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank.

But she added that the rebound was extremely small compared to the steep drops in April and May when activity was hit hard by lockdown measures.

"Production activity tends to move in line with corporate earnings. The stock market is quite healthy but there are doubts about whether corporate performance will be able to catch up with market expectations," Sera said.

Despite June's rise, output was down 16.7% in the second quarter, the largest drop since comparable data became available in 2015, a Ministry of Economy, Trade and Industry (METI) official said.

The government raised its assessment of industrial production to say it had stopped falling and was now picking up. Manufacturers surveyed by the trade ministry expected output to jump 11.3% in July and 3.4% in August, the data showed.

Elsewhere in Asia, factory activity gauges for July in China and for June in South Korea came in better than expected, fuelling hopes that the worst impact from the health crisis has passed.

JOB MARKET 'SEVERE'

Japan's seasonally adjusted jobless rate fell to 2.8% in June, separate government data showed, easing from a three-year high of 2.9% hit the previous month. Economists in a Reuters poll had forecast a higher jobless rate of 3.1%.

The labour market remained in a "severe state" and warranted close monitoring, a government official said, as the decline in the jobless rate was mainly due to a fall in the number of new job-seekers.

The data showed the number of workers in June fell by 770,000 from a year earlier, the official said, while the number of unemployed rose by 330,000 from a year earlier for a fifth straight month of increases.

The jobs-to-applicants ratio dropped to 1.11 in June from 1.20 in May, marking lowest reading since October 2014, labour ministry data showed. It means fewer than six jobs were available per five job-seekers.

Analysts expect Japan's economy to have contracted by more than 20% on an annualised basis in the second quarter as lockdown measures around the world hit business and consumer demand.

Preliminary April-June GDP data will be released on Aug. 17, two weeks after the government announces a revision of first-quarter GDP data on Monday to take into account a large downgrade of business spending for the quarter.

By Daniel Leussink and Tetsushi Kajimoto