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Industrial output in Japan rose in March for the first time in six months, according to government figures.

Production rose by 1.6% in March compared with February, after months of dramatic decline.

The larger-than-expected increase is being seen as a sign that the country’s plunge in production and exports may be nearing an end.

The world’s second biggest economy has been hit hard by the global downturn, sliding into a sharp recession.

Weaker economy

Meanwhile the Bank of Japan has downgraded its forecast for the economy.

It now suggests that GDP will shrink by 3.1% in the year to March 2010, compared to an earlier forecast of 2%, but it argues that a recovery will begin in 2010.

And it warned that consumer prices will fall by 1.5%, pushing Japan into deflation.

However, its economic forecast is still much more optimistic than the IMF, which forecast a 6.2% fall in the Japanese economy – the largest of any G7 countries.

The Bank of Japan said recovery would be dependent on the return of the world economy to global growth, and stability in financial markets.

It is keeping interest rates at 0.1%, and hoping that the big stimulus package announced by the Japanese government will help boost growth.

On Monday, the government submitted its plans to the Diet for its latest stimulus package, worth 15 trillion yen ($155bn, £105bn).

“The BOJ’s growth forecast reflects its expectations that the massive fiscal spending will have a positive effect in bolstering GDP, as well as a rebound from sluggish growth a year earlier,” said Takeo Okuhara at Daiwa SB Asset Management.

Manufacturing recovery

These are grim times for Japan’s economy but the latest figures from the government show a small improvement.

But the new figures are a sign that the strategy of Japan’s manufacturers – to mothball production lines, reduce shifts and lay off staff – may be working.

With stockpiles of unsold goods diminishing some factories are starting to come back to life.

Japan has been hit badly by the downturn because worldwide demand has collapsed for its cars and electronics.

The increase follows figures earlier this month showing that exports have also risen slightly, although shipments are still running at just over half the levels of a year ago.

A government survey of manufacturers showed they expect industrial production to continue to rise, by 4.3% during April and by 6.1% in May.