Japan government upgrades economic assessment in February as factory output stabilizes

TOKYO (Reuters) - Japan's government raised its assessment of the economy in February for the second consecutive month, saying factory output has bottomed out and corporate sentiment is improving due to the falling yen and rising share prices.

The government raised its assessment of factory output, corporate sentiment, corporate earnings and consumer spending as the economy shows signs of emerging from a mild recession that began early last year.

The government reiterated that it expects the Bank of Japan to take bold steps to meet a 2 percent inflation target as part of a push to escape nagging deflation and to revive the economy.

"The economy has bottomed out, but some weak areas remain," the Cabinet Office said in its monthly economic report released on Wednesday.

"Some weakness is likely to remain for the time being, but we expect the economy to recover as sentiment improves due to improving exports, economic stimulus and the impact of monetary policy."

This marked an upgrade from last month, when the government said some parts of the economy were showing signs of bottoming out.

The last time the government upgraded the economic assessment two months in a row was in January and February 2011, one month before a record earthquake destroyed much of the country's northeast coast and triggered a nuclear disaster.

The government said industrial production has bottomed out and could start to gain some momentum as automakers increase production for shipments to the United States, a Cabinet Office official said.

That was an improvement from last month when data showed only tentative signs that factory output would stabilize.

The government turned more positive on corporate earnings and corporate sentiment to reflect improvements seen in some government data and in the Reuters tankan, the official said.

Gains in retail sales and a rebound in new car sales also led the government to raise its view of consumer spending, the report showed.

Japan's economy shrank 0.1 percent in October-December. That marked the third consecutive quarter of contraction but was slower than a 1.0 percent contraction in July-September, suggesting the economy is pulling out of recession.

At least two consecutive quarters of contraction is a commonly accepted definition of a recession.

Prime Minister Shinzo Abe, who led his Liberal Democratic Party to a landslide election victory in December, has called for aggressive monetary easing and heavy fiscal spending to beat persistent deflation, helping to drive down the yen and push up stock prices.

(Reporting by Stanley White; Editing by Kim Coghill)