May 29 (Bloomberg) -- Japan’s industrial output surged the most in 56 years in April as a rebound in exports helped the economy emerge from its worst recession since World War II.

Production rose 5.2 percent from March, the second monthly gain, the Trade Ministry said today in Tokyo. The increase was faster than the 3.3 percent economists estimated, and companies said they planned to boost output in May and June as well.

The yen gained on speculation funds will flow into Japan as the economy resumes growing after last quarter’s record contraction. Still, output is running at two-thirds last year’s levels, saddling manufacturers such as Nikon Corp. with workers they no longer need and driving the jobless rate to a five-year high of 5 percent.

“This is not so much a green shoot as it is a green tree,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. “Optimism on Japan is certainly not misplaced as we look at a reasonably strong quarter of growth in April to June.”

The yen traded at 96.33 per dollar at 1:01 p.m. in Tokyo from 96.76 before the report was published. The Nikkei 225 Stock Average headed for its third monthly gain today. The gauge has risen 34 percent from a 26-year low on March 10. The yield on Japan’s 10-year bond was unchanged at 1.47 percent.

BOJ’s Shirakawa

While the increase in production was the biggest since March 1953, a year after the U.S. military occupation ended, output is coming from a low base.

“The actual level is about where Japanese industrial production was in 1980,” said Andrew Bell, head of research and strategy at Rensburg Sheppards Plc in London.

Bank of Japan Governor Masaaki Shirakawa said this week the economy will resume growing this quarter after shrinking a record 15.2 percent in the three months ended March 31. Stimulus spending by governments around the world totaling $2.2 trillion has helped to prop up demand from abroad. Exports rose 1.9 percent in April from March, a second monthly gain.

Companies are making more cars and electronics to replenish stockpiles they managed to drain during the export slump. Inventories fell 2.7 percent in April, a fourth monthly drop. Businesses surveyed by the Trade Ministry said production will increase 8.8 percent in May and 2.7 percent in June.

Prospects for consumers were less reassuring.

Unemployment Toll

The 5 percent jobless rate is the highest since November 2003, the statistics bureau said today. Job seekers found it harder to secure work as the ratio of positions available to each applicant slid to 0.46, matching the lowest ever in June 1999, a Labor Ministry report showed. Household spending slumped for a 14th month, a record losing streak.

“Japan’s economy may return to growth in the second quarter, but looking beyond, there will be strong downside risks,” said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. “The deterioration in employment and income conditions will likely become clearer in the months ahead, taking a toll on consumers and the economy.”

Japan and other Asian economies may also run the risk of becoming overly reliant on exports to the U.S. for growth, making it difficult for the region to lead the world out of recession, said Stephen Roach, chairman of Morgan Stanley Asia.

“The region’s fate remains made in America,” he said in an e-mailed note. “That is where hopes of an Asia-led rebound are most tenuous. After a dozen years of excess, the overextended American consumer is tapped out.”

Prices

Weakening domestic demand is increasing the risk that deflation will once again plague the world’s second-largest economy. Consumer prices excluding fresh food fell 0.1 percent in April from a year earlier, a second straight drop. In Tokyo, prices slid 0.7 percent in May, the most in six years, signaling nationwide declines may accelerate this month.

“Underlying deflation is worsening and set to persist for a prolonged period,” said Richard Jerram, chief Japan economist at Macquarie Securities Ltd. in Tokyo.

Nikon, a camera maker which is forecasting its biggest loss in 11 years, said this week it will eliminate 1,000 jobs and Nisshin Steel Co. said yesterday it plans to cut 9 percent of its workforce.

China’s $586 billion stimulus plan has been a boon to Japanese manufacturers struggling with depressed sales in the U.S. Goldman Sachs Group Inc. last week raised its ratings of equipment-makers Hitachi Construction Machinery Co. and Komatsu Ltd., citing the prospect of increased business from China, where government spending is driving building investment.

Incentives

Government incentives in Europe are also helping sales at carmakers including Mazda Motor Corp. The automaker said last week it will cancel plans to suspend production at a plant in Hiroshima in order to meet demand from Germany and France, where governments are encouraging consumers to trade in their old cars for more fuel-efficient models.

Even as demand picks up, exports and production remain about a third lower than they were before the global financial crisis deepened in September. Output slid 31.2 percent in April from a year earlier and exports dropped 39.1 percent.

“It’s dangerous to be too pleased with the economy bottoming out,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. “Japan’s economy will fly low and experience more turbulence until the second half of next year.”

To contact the reporters on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net; Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

Last Updated: May 29, 2009 06:48 EDT