UPDATE 3-Japan output nudges higher, seen slowing

* Output up 1.3 pct in April vs forecast 2.5 pct rise

* Manufacturers surveyed see tiny output gains in May, June

* Japan political turmoil may hurt sentiment - analyst

* Q1 output gap narrows in a sign deflation is easing (Adds output gap data, Shirakawa quotes)

By Stanley White

TOKYO, May 31 (Reuters) - Japanese factory output rose less than expected in April, suggesting that growth in manufacturing will slow in coming months as the benefits of robust exports to fast-growing Asian economies may be moderating.

Japan's economic recovery is likely to remain on track, but overall growth is likely to slow after a robust expansion in the first quarter, economists say.

Manufacturers surveyed by the government expect output to continue increasing slowly in May and June, suggesting the slowdown from sharp gains in the first quarter will be gradual.

"Output growth will slow temporarily in April-June, which was expected as the strong growth marked in the first quarter was unsustainable in the first place. It will be a healthy slowdown," said Kyohei Morita, chief Japan economist at Barclays Capital.

Still, some analysts point to uncertainties clouding the outlook such as market jitters over Europe's debt problems and the political deadlock in Japan. [ID:nSGE64T00L]

"The political turmoil in Japan may not immediately deal a blow to the economy, but may dampen foreign investors' appetite for Japanese stocks and stock falls may affect consumer sentiment," said Junko Nishioka, chief Japan economist at RBS Securities.

Industrial output rose 1.3 percent in April, less than a median market forecast for a 2.5 percent increase, government data showed on Monday. [JPIP1=ECI]

Manufacturers surveyed by the Ministry of Economy, Trade and Industry expect output to rise 0.4 percent in May and increase 0.3 percent in June. [JPIP2=ECI] [JPIP3=ECI] <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on Japanese output r.reuters.com/jeg37k More stories on Japan's economy [ID:nECONJP] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Investors shrugged off the data, focusing instead on persistent worries about the euro zone's debt crisis.

Markets are keeping an eye on Japan's political turmoil after the tiny Social Democratic Party left the ruling coalition ahead of an upper house election, although its impact on the currency market so far is seen as limited. [ID:nSGE64T00L]

Strong exports to Asia helped Japan's economy grow 1.2 percent in January-March, outpacing U.S. and euro-zone growth during the same period. [ID:nTOE64J003]

Output for machines used to make semiconductors and flat panel displays rose in April, with demand mostly coming from the United States, China, Taiwan and South Korea.

Production of flat panel TVs fell 3.8 percent in April as the government excluded some models from a subsidies programme for energy-efficient goods, the official said.

Car and truck manufacturers, which also benefited from the same subsidies, expect output to fall 1.4 percent in May and drop 2.6 percent in June as they turn more cautious on the outlook.

Still, a separate survey showed Japanese manufacturing activity rose in May to the highest level in almost four years. [ID:nTKC005843]

The improvement is helping to narrow the output gap -- or the difference between gross domestic product and the level of growth when the economy is running at full capacity -- and ease deflationary pressure from weak demand.

The output gap narrowed to minus 4.8 percent in the first quarter from minus 5.8 percent in October-December, data showed on Monday, showing that supply continued to outstrip demand but at a smaller margin than before. A negative figure means there is downward price pressure from overcapacity or weak demand.

In a tentative sign that improvements in the economy were broadening, Japanese firms increased overtime pay by a record 11.7 percent in March from a year earlier. [ID:nTKC005818]

Bank of Japan Governor Masaaki Shirakawa said strong Asian growth would keep Japan's economy on track for a steady recovery but warned that Europe's debt problems remained a risk.

"If problems in Greece heighten tensions in global markets or weigh on global growth, Japan's economy may undershoot (the BOJ's forecasts)," Shirakawa said in a speech on Monday. [ID:nTOE64U04M] (Additional reporting by Leika Kihara, Rie Ishiguro and Akiko Takeda; Editing by Charlotte Cooper and Chris Gallagher)