TOKYO, July 22 (Reuters) - Japanese manufacturing activity shrank in July at a slower pace than the previous month but new export orders contracted at the fastest in more than 3-1/2 years, an indication recent yen gains are hurting exporters.
The IHS Markit/Nikkei Japan Flash Manufacturing Purchasing Managers Index (PMI) edged up to 49.0 in July on a seasonally adjusted basis versus a final reading of 48.1 in June.
The headline index remained below the 50 threshold that separates contraction from expansion for the fifth month.
The index for new export orders fell to a preliminary reading of 44.0, which would be the lowest level since December 2012 if confirmed in revised data.
"International demand fell at the sharpest rate in over three-and-a-half years, with many panelists blaming the appreciation of the yen leading to a reduction in global competitiveness," a statement released with the survey said.
The yen <JPY=> has risen around 13 percent versus the dollar so far this year, and some Japanese policymakers are worried that further gains will erode exporters' earnings and increase deflationary pressure by lowering import prices.
The Bank of Japan is expected to ease monetary policy at a meeting ending on July 29, according to a majority of economists polled by Reuters, to boost anemic inflation.
The government is also crafting a massive spending package worth about 20 trillion yen ($188.09 billion), three government sources told Reuters on Thursday.
However, economists worry that the benefits could be muted as spending will be spread over several years and rely much on private sector investment.
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(Reporting by Stanley White; Editing by Sam Holmes)