Japan's economy grew at an annualized real 3.5 percent in the April-June quarter, much faster than previously reported, as companies and consumers stepped up spending amid the waning impact of the COVID-19 pandemic, the Cabinet Office said Thursday.

Real gross domestic product, adjusted for inflation, was previously estimated to have expanded 2.2 percent. On a quarterly basis, it increased 0.9 percent, revised upward from an earlier reading of 0.5 percent. GDP is the total value of goods and services produced in a country.

The figure, higher than the average market forecast of a 2.9 percent increase, confirmed the third straight quarter of growth and the return of the world's third-largest economy to a pre-pandemic size.

Economic activity picked up in the April-June period, helped by the removal of anti-virus curbs that had weighed on demand, but economists remain cautious about the growth outlook, partly because inflation is accelerating.

Capital spending increased 2.0 percent, larger than the initially reported 1.4 percent, as a decline in COVID-19 cases helped to reduce uncertainty, prompting companies to step up investments in factories, equipment and software.

Private consumption, which accounts for more than half of the economy, rose 1.2 percent, compared with 1.1 percent in the preliminary data.

The higher growth came as a result of more spending on dining out, hotels and transportation fees, a sign of a gradual return to normalcy. A big rise in expenditure on clothing was a major driver behind the upward revision, a government official said.

"The recovery from the Omicron-driven fallout was much stronger than initially thought. But it didn't change our view of the state of the economy. It only means that the economy regained its pre-pandemic size," said Shinichiro Kobayashi, a senior economist at Mitsubishi UFJ Research and Consulting.

Kobayashi said downward pressure on the economy from rising COVID-19 cases appears to have been easing but demand for leisure and face-to-face services has yet to return to levels in the pre-pandemic period. Rising goods prices are also casting a cloud over the outlook for private consumption, he said.

The government plans to extend more support to struggling households amid higher energy and food prices, largely driven by Russia's war in Ukraine, with a fresh relief package set to be unveiled Friday.

The rapid depreciation of the yen has raised concern about the impact on the resource-scarce economy because a weak yen inflates import costs.

Exports grew 0.9 percent, unchanged from the initial data released last month, while imports increased 0.6 percent, down from 0.7 percent. Japan's GDP had a bigger net contribution from external demand, the data showed.

The U.S. Federal Reserve and other major central banks are raising interest rates to tame surging inflation. But aggressive rate hikes risk slowing economic growth, which would work as a negative for the Japanese economy where exports remain a major driver of growth.

"It is hard to expect a more robust economic recovery led by external demand at a time when (major central banks) are trying to curb strong demand and soaring inflation," Kobayashi said. "Economic growth will inevitably slow in the current quarter from April-June."

Public investment was revised upward to 1.0 percent from 0.9 percent.

Unadjusted for inflation, nominal GDP grew at a revised, annualized rate of 2.5 percent in the reporting quarter, instead of 1.1 percent.

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