Industrial output rose 2.4 percent in October, beating a median forecast for a 1.0 percent increase. That followed a 3.3 percent decline in September, which was the first drop since the devastating earthquake and tsunami in March.

The data suggests that the world's third-largest economy, which recovered from a slump caused by the quake, stands a better chance of avoiding a soft patch before an expected boost from a $155 billion reconstruction budget still some months away. 

Policymakers have tried to soften the impact of yen rises through currency market intervention and monetary easing, but they may feel pressure to act again to ensure recovery remains on track at least until reconstruction spending kicks in. 

"Carmakers are increasing production to make up for production lost after the earthquake," said Norio Miyagawa, a senior economist at Mizuho Securities Research & Consulting. 

"Also, the impact from flooding in Thailand is less then expected. The trend is output is recovering, but there are a lot of risks to exports because of Europe's debt problems." 

Transport machinery makers' output rose 11.6 percent in October, with auto-parts makers increasing output by 8.4 percent as some boosted domestic production to make up for disruptions in Thailand, a government official said at a briefing. 

Manufacturers surveyed by the Ministry of Economy, Trade and Industry expect output to fall 0.1 percent in November and increase 2.7 percent in December. 

The forecast for November likely reflects to some extent the effect of output disruptions caused by widespread flooding in Thailand's manufacturing base, where many Japanese companies build goods or parts, Mizuho's Miyagawa said. 

Telecommunications equipment makers expect output to have fallen 14.1 percent in November, with some citing parts shortages due to the Thai flooding. But they expect output to increase 29.3 percent in December, as they plan to make up for the shortfall, the government official said. 

The Markit/JMMA Purchasing Managers Index showed manufacturing contracted in November at the fastest pace since the March earthquake, in another sign of the impending impact from the Thai floods and slowing growth in China. 

If industrial output growth in November and December is as forecast, output will rise 1.2 percent in the fourth quarter from the previous quarter, the official said.

Japan's economy rebounded from a recession triggered by the earthquake and tsunami, but is expected to slow sharply this quarter as the initial spurt driven by companies restoring supply chains and production facilities tails off.

The Bank of Japan predicts exports and output will likely be flat for the time being before resuming a moderate increase. But that outlook is highly uncertain due to slowing global growth and the pain from a strong yen, it says. 

The BoJ, due to hold this year's last scheduled policy review on Dec. 20-21, has signaled its readiness to ease policy again if its scenario of a moderate economic recovery comes under threat.