April 27 (Bloomberg) -- Japan’s economic deterioration is moderating as companies resume production and household sentiment improves, a government official said.

“I can see Japan’s freefall ending by looking at parts of the economy such as consumer confidence and the outlook for production,” Bunshichi Fujioka, vice minister for policy coordination at the Cabinet Office, said at a news conference in Tokyo today. “I can’t say when but I expect the economy will hit bottom soon.”

The Cabinet Office said today the economy will shrink a record 3.3 percent in the year that started April 1, still less than the 12.1 percent annualized pace of contraction in the last three months of 2008. Signs that the decline is easing have mounted in recent weeks: exports grew in March from February, the first gain in nine months; manufacturers expect to increase output; and confidence among merchants, consumers and small businesses all rose last month.

“The real news is the recent stabilization in the monthly economic data, which bodes well for the prospects of an early recovery,” said Julian Jessop, chief international economist at Capital Economics Ltd. in Tokyo. “The recovery does seem to have momentum.”

Prime Minister Taro Aso’s record 15.4 trillion yen stimulus package will provide at least temporary relief for the world’s second-largest economy as it heads for the worst recession since World War II, Morgan Stanley, Nomura Securities Co. and Nikko Citigroup Ltd. said this month.

Nikkei’s Rebound

The Nikkei 225 Stock Average rose 0.2 percent today and has climbed 24 percent since it slid to a 26-year low on March 10. Sharp Corp., Japan’s biggest maker of liquid-crystal- display televisions, today unexpectedly forecast a return to profit this fiscal year.

Industrial production probably rose 0.8 percent in March from a month earlier as exporters replenished inventories, economists surveyed by Bloomberg News expect a report will show on April 30. Output fell in each of the previous five months, including a record 10.1 percent in January.

Still, Finance Minister Kaoru Yosano played down recent reports that showed the economy may have started to recover.

“We shouldn’t be too optimistic,” he said at a news conference after the Cabinet approved the economic forecasts in Tokyo today. “We need to think about things on the assumption that economic conditions will remain very severe.”

IMF Forecast

The International Monetary Fund said last week that Japan’s economy will shrink 6.2 percent in 2009, the worst among advanced economies, compared with its January projection of a 2.6 percent contraction.

The Cabinet today also approved a record 13.9 trillion yen in extra spending for this fiscal year to help pay for Aso’s stimulus plan.

“This extra budget is extremely exceptional expenditure to deal with an emergency,” said Yosano, who also heads the Cabinet Office. “Exports have declined more than expected, devastating companies.”

Shipments abroad are likely to fall an unprecedented 27.6 percent this fiscal year, the Cabinet Office said. Capital spending is estimated to decline a record 14.1 percent, and the unemployment rate will rise to 5.2 percent from 4.4 percent.

“Japan’s stimulus plan will create some demand to help the economy,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo. “But it’s unlikely to create sufficient jobs to help households, so it’s not enough to bring the economy back on a sustainable recovery track.”

To contact the reporters on this story: Tatsuo Ito in Tokyo at tito2@bloomberg.net; Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

Last Updated: April 27, 2009 03:55 EDT