A family looks at Toyota Motor Corp.’s vehicles displayed at the company’s showroom in Tokyo.

Hopes mounted Monday that Japan’s economy is on the mend after its worst recession in decades as the current account surplus showed the first rise in 16 months and machinery orders rebounded.

The figure easily beat market expectations for an increase of about 40 percent, helping to lift the Nikkei stock index up to a new 10-month high.

The trade surplus alone rose more than two-fold to 602.2 billion yen from 249.0 billion a year earlier.

Exports increased 14.6 percent in June from the previous month, narrowing their year-on-year decline to 37 percent, after a fall of 42.2 percent in May, the data showed.

Japan’s heavy dependence on foreign demand to drive its economy left it highly vulnerable to the global economic slowdown, which crushed demand for its key exports such as cars, high-tech goods and machinery.

But analysts believe the world’s second largest economy returned to positive growth in the April-June quarter as exports and factory output rebounded.

“The economy seems to be recovering steadily,” said Toshihiko Matsuno, head of research at SMBC Friend Securities.

But he added: “The prospect of a US economic recovery remains unclear. We need to remain cautious.”

There was also good news on core machinery orders, a closely watched indicator of corporate capital spending, which rebounded by a stronger-than-expected 9.7 percent in June from a record low the previous month. It was the first increase in four months.

Japanese companies have been slashing their investment to try to survive the country’s deepest recession in decades, but there are hopes that the worst of the economic slump is over.

Even so, core orders are expected to decline 8.6 percent in the three months to September from the previous quarter, following a drop of 4.9 percent in April-June, according to the manufacturers’ own forecasts.

The worst of the slump in business activity seems to be over but the pace of recovery is likely to be limited, RBS Securities economist Junko Nishioka said.

Many Japanese companies, including Sony and Toyota Motor, recently announced better-than-expected business results for the first quarter of the fiscal year, although the situation remains very difficult.

“Companies still seem to be refraining from reviewing their plans to reduce business investment, but I don’t think they are pessimistic,” said Yuji Shimanaka, an economist at Mitsubishi UFJ Research and Consulting.

“Overall, the earnings reports for the April-June quarter turned out to be pretty good,” he said. “I expect the domestic recovery will continue until the end of fiscal 2010.”

The economy shrank at an annualized pace of 14.2 percent in the first quarter of 2009, its worst performance on record, but analysts say Japan is likely to be one of the first major economies to return to positive growth.

UBS economist Takuji Aida thinks Japan’s gross domestic product (GDP) grew at an annualized rate of 3.0 percent in April-June, data for which will be released on August 17.

“After four straight quarters of negative growth, positive growth in second quarter GDP will mark the first step toward a cyclical recovery,” he said.

Source: AFP