Japan's economy was surprisingly strong in the April-June quarter, helped by a rise in business investment and better-than-expected private spending, reinforcing views that the country's recovery may be starting to get a firmer footing.

Government data yesterday showed that the gross domestic product (GDP) grew by 0.6 per cent from the previous quarter, which was the sixth successive quarter of growth and well above a median forecast of 0.2 per cent in a Reuters poll.

On an yearly basis, the GDP rose 2.3 per cent.

The figures confirm a recent brighter trend in the economy that has seen business investment and sentiment pick up and stock prices rise, prompting both the government and the central bank to raise their assessments of economic conditions.

"It's definitely positive news and suggests that the expansion is continuing, and if anything things might pick up a bit more in the second half of this year," said Peter Morgan, chief economist at HSBC Securities.

The figures will make good reading for Prime Minister Junichiro Koizumi, who is facing a September election to keep his job as leader of the ruling coalition - and with it the post of prime minister - which has put his management of the economy in the spotlight.

The stock market rose on the GDP news, with the Nikkei average up 1.19 per cent at 9,601.07 in midmorning.

"Although capital spending in non-manufacturing sectors remained weak and consumer spending stayed soft, market concern about a possible recession will recede with the firm GDP data," said Ryutaro Kono, chief economist at BNP Paribas.

The yen rose briefly, but then dropped back, with currency traders not convinced that Japanese growth will get much stronger in the near term.

That will come as a relief to the Japanese authorities, who have been working to hold the yen down to protect exports, one of the economy's main drivers which have been slowing recently.

The surprise 2.4 per cent annualised growth in the US economy in the April-June period may indicate a change for the better in Japan's largest export market, although Germany's is likely to have contracted in the quarter, giving a mixed picture for the world's three largest economies.

Economists noted that one-off factors such as Asia's SARS (severe acute respiratory syndrome) outbreak boosted the export part of the latest GDP figures.

"Net exports were helped greatly by reduced imports, because of a decline in overseas travel due to SARS," said Mamoru Yamazaki, chief economist at Barclays Capital.

"But given a likely recovery in Asian and US economies, I don't think exports will fall into negative territory going ahead."

Spending by Japanese businesses rose 1.3 per cent in the quarter, above the poll forecast of 0.7 per cent.

Many companies are more confident about the future after earnings in the April-June quarter showed signs of improvement for selected technology firms, as booming sales of digital cameras and liquid crystal display (LCD) TVs lifted profits at Sharp Corp and Canon Inc.

Private consumption posted a surprising 0.3 per cent rise, against poll expectations of a 0.1 per cent fall. The government said that the rise came from strong sales of digital cameras and recreational services.

The government revised its figures for GDP in the January to March quarter, saying growth was 0.3 per cent rather than the preliminary 0.1 per cent.

For the fiscal year that ended in March 2003, GDP growth was revised up to 1.6 per cent from 1.5 per cent.

However, people on the streets of Tokyo were far from convinced that life was taking a turn for the better. Complaining about the economy has become a feature of everyday conversation in the city and yesterday's data did not alter that.

"The state of the economy is terrible. I don't see any real improvement in spending and that means a lot of empty seats," said Tatsuya Negishi, a 55-year old taxi driver.

Store manager Isamu Masuyama said he saw a lot more caution among shoppers.

"I don't feel the economy is picking up. Spending per person is about 10 per cent down from last year," he said. "Workers are not buying cakes or other types of luxuries now, they are only buying what they need."

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