On top of that, a slowdown in major trading partner China and recent turmoil in its stock markets have sparked worries of a further hit to Japan’s economy.

That was well shy of forecasts for an increase of 3.3 percent following the 7.9 percent contraction in June. “While uncertainty remains high about China and global economy, poor orders, particularly at the service sector, reflect persistent weakness in domestic demand”, said Takeshi Minami, chief economist at Norinchukin Research Institute.

The revision comes as Japan Prime Minister Shinzo Abe was re-selected president of the ruling Liberal Democratic Party, potentially extending his rule as premier until 2018.

A 1.2 percent overnight jump in offshore yuan against the dollar, after suspected rare intervention by Chinese state-owned banks, also provided a lift to the Aussie, but dealers in London said many investors were happy to take profit on a solid performance for the Australian currency this week.

The BOJ holds its next policy meeting on September 14-15, but it faces a stern test of whether it will ease policy again when it updates its long-term forecasts at the end of October.

The BOJ is expected to offer a bleaker view on overseas economies and may lower its assessment on Japan’s exports at next week’s rate review, sources told Reuters.

TOKYO-Bank of Japan Governor Haruhiko Kuroda said Thursday that the economy will likely avert a recession, although he acknowledged that the central bank could fall behind schedule on achieving 2% inflation next year.

Worryingly, the Cabinet Office cut its assessment of core orders, saying a pickup is seen stalling.

A government survey on Friday showed Japanese business sentiment turned positive in July-September and companies stuck to upbeat spending plans, offering the yen some support.

Compared with a year earlier, core orders, which exclude those of ships and electric power utilities, increased 2.8 percent in July, versus a 10.5 percent annual gain expected. Now, the outlook may not be so clear, with weakness in industrial output and exports weighing on a rebound, and renewed declines in oil pressuring inflation expectations, according to the people, who asked not to be named because the discussions were private.