Japan's industry raised production for the third month in a row in May, but doubts remained whether it can sustain the momentum without a clear rebound in the United States and other key export markets.
The U.S. economy is showing signs that its worst recession in decades is abating, but Washington is hedging its bets, with a top White House adviser saying President Barack Obama could discuss more stimulus spending if needed.
China also flagged a possibility of more spending to boost consumption and compensate for the blow to its exports dealt by the worst global economic and financial crisis since the Great Depression.
But Japan's anaemic spending at home meant its fortunes largely depend on global consumers and the world's No. 2 economy has yet to see a lasting recovery in its exports and overall economic activity.
"Japan's economy won't bounce back in the true sense until the global economy, and especially the U.S. economy, recovers. And that won't be until the second half of this year or early next year," said Junko Nishioka, chief economist at RBS Securities.
Global recovery hopes have pushed global stocks more than 20 percent higher in the second quarter. But the rally has stalled in the past weeks, reflecting worries that markets may have been too aggressive in their bets on the strength and the timing of the nascent upturn.
Tokyo shares fell 1 percent on Monday, while stocks elsewhere in Asia dipped 0.6 percent as investors booked profits from the powerful second quarter rally.
The dollar crept up after being hit on Friday by a renewed call by China to reduce its global domination as a reserve currency.
On the sidelines of a meeting of central bankers over the weekend , China and Brazil said they were discussing an arrangement to settle trade deals in local currencies.
RETURN TO GROWTH
Japanese industrial production rose 5.9 percent in May and manufacturers forecast further, albeit smaller, increases in the next two month. That improvement is set to be reflected in the Bank of Japan's quarterly tankan business survey on Wednesday.
Yet the upturn comes after a deep slump, leaving production still nearly a third below year ago levels and companies with a lot of idle capacity.
Analysts believe the restocking of inventories, aggressively slashed last year, will allow the Japanese economy to grow again in the second quarter after a record year-long contraction.
But with unemployment set to rise further from a 5-½ year high of 5 percent hit in April and further dampen already subdued consumer spending, economists fear the upturn may fizzle away.
That is also a concern in the United States, where last news news of a rise in consumer spending and income coincided with a report that the U.S. savings rate hit a record high, showing that much of government stimulus money was being stashed away.
Senior White House adviser David Axelrod said on Sunday the $787 billion stimulus bill pushed through by Obama in January should be enough to put the world's biggest economy back on its feet. But he acknowledged high unemployment was a worry and did not rule out additional steps.
"Right now we believe what we have done is adequate to the task. If more is needed, we'll have that discussion."
Back in January, the White House said it hoped to keep unemployment under double-digit levels, but now it warns the jobless rate could breach 10 percent in coming months, up from 9.4 percent in May.
Later on Monday, the sentencing of Bernard Madoff will serve as a reminder of market excess and oversight flaws that led to the crisis, which cost millions of Americans their jobs. Madoff, 71, accused of masterminding Wall Street's biggest investment fraud, faces an effective life term in prison.
More job losses ahead are also looming large over the euro zone economy, which is expected to trail both Japan and the United States in returning to growth. The International Monetary Fund warned France, the area's second-biggest economy, that it had limited scope for further economic stimulus because it faced "uncomfortably high fiscal deficits."
TOO EARLY FOR EXIT
Evidence that the world's deepest recession in six decades was abating stirred a debate on how and how soon the extraordinary measures taken by policymakers around the world to avert a financial meltdown should be phased away.
But top central bankers gathered at the Bank of International Settlements meeting over the weekend said it would be much premature to withdraw trillions of dollars of economic stimulus and tighten policies after a spell of record low interest rates.
"I think that we are not out of the woods yet," said Guillermo Ortiz, Mexico central bank governor and BIS board chairman. "One important question is whether these green shoots actually take root."
In a reminder that economic pump-priming had undesired side-effects a Chinese government think tank official said there were early signs of asset price bubbles emerging as a result of a surge in lending.
