TOKYO—The Japanese government upgraded its assessment of the economy for the second straight month in February, saying that conditions are improving as recovering exports boost production.
The nation's economy "is moving toward a pickup as it emerges from its recent pause," the Cabinet Office's monthly economic report released Monday showed.
Behind this renewed optimism are lofty expectations for demand overseas. While data last week showed that Japan ceded its spot as the world's second biggest economy to China in 2010, with an annualized 1.1% fall in October-December gross domestic product, demand from the fast-growing Chinese market is also galvanizing corporate Japan.
The government raised its view on exports, a key engine of growth, for the first time in 16 months, and raised its assessment of industrial production for the second straight month, saying both show signs of picking up.
Echoing the report's relatively upbeat outlook, Japan's economy minister Monday predicted that the nation's GDP will probably grow in the January-March period and return to a recovery path unless risk factors materialize.
The GDP "will probably turn positive" in the current quarter, Minister of State for Economic and Fiscal Policy Kaoru Yosano said at a news conference.
However, in determining if Japan's economy has completely emerged from the lull it has been in, Mr. Yosano noted that real and nominal GDP needs to be positive and the domestic price index must stay above zero for several months.
Mr. Yosano added that unemployment in the U.S. remains high, but consumption is picking up. He said that share prices, which are regarded as leading indicator for the economy, suggest that the U.S. economy is in good shape.
The monthly report stopped short of declaring that the economy is on a sustained growth path, citing uncertainty over whether exports and output will maintain their upward momentum in coming months.
Mr. Yosano also said high oil and other commodity prices will have a negative impact on the Japanese economy and that the government needs to carefully watch the unfolding situation in the Middle East.
"The focus is on whether the upward trend in output and exports will be sustainable," said Fumihira Nishizaki, a senior official at the Cabinet Office.
The government also downgraded its assessment on private consumption, saying it is nearly flat. In January, it had said that consumption was picking up despite some areas of weakness.
Industrial output grew 3.3% in December from the previous month and was forecast to gain 5.7% in January. If January's data is in line with that forecast, it would mean "there's a chance the economy has overcome its lull," the cabinet official said.
Among potential risks to the economy, the report cited the possibility of a slowdown in key export markets, abrupt currency volatility, and a spike in oil prices.
The report also said that deflation and a possible deterioration in employment conditions at home need to be carefully monitored.