Forecasts showed Japan's manufacturing sector, pivotal for the country's export-oriented economy, is projected to rise 4.3 per cent in April and another 6.1 per cent in May.

The announcement was warmly welcomed by Japanese investors with the benchmark Nikkei share index closing Thursday up by almost four per cent, buoyed also by a strong day on Wall Street.

Outlook revised

"Unless we can see a recovery in the US economy, it is too early to say Japan's economy is back on track"

Hiroshi Watanabe,
Daiwa Institute of Research

But the optimistic news was tempered by an announcement from the Bank of Japan that it now expects the Japanese economy to shrink by 3.1 per cent in the fiscal year to March, more than was previously expected.

The central bank had forecast in January that the economy would contract by around two per cent.

However the BoJ said it expected to see 1.2 per cent growth in the next fiscal year, saying that overseas economies will start recovering from the second half of this year, aided by government efforts to tackle the recession.

Japan's economy, driven by foreign sales of its cars and electronic gadgets, has been mired in its deepest recession since the end of World War II, hit by plunging levels of global consumer and corporate spending.

Major exporters such as Toyota Motor Corp and Sony Corp have responded by reducing shifts, suspending factory lines and slashing thousands of jobs over the past few months.

Recovery uncertain

Japan's economy has been hit by its worst recession since World War Two [EPA]
But the overall outlook for Japan remains grim and analysts cautioned that a sustainable recovery was still uncertain.

"A full recovery in Japan requires strong exports, particularly to the United States," Hiroshi Watanabe, an economist at Tokyo's Daiwa Institute of Research told reporters.

"Unless we can see a recovery in the US economy, it is too early to say Japan's economy is back on track.

Japan's economy suffered a brutal annual contraction of 12.1 per cent in the last three months of 2008 and economists say this year's first quarter could be even worse.

In an effort to prop-up the economy the government has presented to parliament a record supplementary budget calling for 15.4 trillion yen ($159bn) in extra spending.

The cabinet said the newest stimulus package will help protect Japan from a downward spiral while laying the foundation for future growth, including a subsidy for drivers buying "eco-friendly" cars.