Japan today reported its first increase in factory output in six months, fuelling hopes that the worst recession since World War II may be easing as exports bottom out.
The world's second-largest economy entered a severe slump last year as consumers around the world stopped buying Japan's cars, high-tech gadgets and other goods, but analysts say there are signs that it may be through the worst.
Factories boosted production by 1.6% in March compared with February, after a plunge of around one third since September. Output is expected to rebound a further 4.3% in April and 6.1% in May, according to manufacturers' forecasts.
Investors welcomed the better-than-expected data, with Tokyo shares soaring almost 4%, helped by strong gains on Wall Street.
Japan's economy suffered a brutal annual contraction of 12.1% in the last three months of 2008 and analysts say this year's first quarter could be even worse.
The Bank of Japan predicted today that the economy would shrink 3.1% in this fiscal year to March, more than previously expected.
But the pace of decline in exports and production would slow, paving the way for 1.2% growth in the next fiscal year, the bank said as it left its key interest rate on hold at 0.1%, as expected.
Recent export data have supported hopes that Japan's slump may be easing, even if prospects for a full-fledged recovery appear dim while the global economy remains weak, given Japan's heavy dependence on foreign markets.
Japan's economic downturn was caused almost entirely by a downturn in foreign markets. As consumers overseas stopped buying Japanese products, companies slashed their production to reduce a glut of unsold products.
Now some firms, such as car makers, are starting to gradually increase output again. An emerging economic recovery in China - Japan's largest trading partner - as well as Tokyo's fresh stimulus spending of about $150 billion are expected to help arrest the economy's decline.
But concerns are growing about domestic demand. Consumer spending was sluggish in Japan even before the recession and rising unemployment is expected to make people even more cautious about splurging.
Another worry is that companies are reducing their business investment, which has been another key driver of the economy.
In the next fiscal year, Japan's economy should grow 1.2%, the Bank of Japan predicted. But risks linger, including a spreading swine flu outbreak, whose effects on the economy 'need to be monitored carefully,' it added.
