Japan's manufacturing sector contracted again in July but the pace of deterioration slowed, flash survey data from Markit showed Friday.

The manufacturing Purchasing Managers' Index rose to 49 in July from 48.1 in June. A reading below 50 indicates contraction in the sector.

Output and new orders shrank at a slower pace in July. International demand fell at the sharpest rate in over three-and-a-half years.

At the same time, employment growth accelerated and backlogs of work dropped at a slower rate.

"On a more positive note, the stronger yen/dollar rate helped to ease inflationary pressures as input prices decreased at the fastest rate since November 2009," Amy Brownbill, economist at Markit, said.