TOKYO - Japan's new prime minister got some good news on his first full day in office on Thursday as the central bank said the struggling economy was showing signs of recovery from its worst recession since World War Two.

Yukio Hatoyama, whose Democratic Party trounced the long-dominant Liberal Democrats last month, has pledged to radically change how the country is run, wean the economy from exports and create more equal ties with close ally Washington.

He now faces pressure to make good on promises to focus spending on consumers, cut waste and reduce bureaucrats' control over policy, while nurturing a nascent recovery from recession despite a huge public debt.

In an encouraging sign for the new government, the Bank of Japan upgraded its assessment of the economy, as exports and output bounced back from a steep fall triggered by the global crisis.

But analysts warn of a rocky road ahead since Japan's incipient recovery is largely due to the temporary effects of global government stimulus steps.

Output is improving, but consumption is only being supported by the government's stimulus measures. Corporate spending remains weak, with little sign of improvement, said Yoshikiyo Shimamine, chief economist at Dai-ichi Life Research Institute.

A big gap in supply and demand remains, meaning deflationary pressure is still very strong.

Hatoyama's new cabinet must get started quickly on tough tasks including drafting a budget for the year from April 1 to fund its pledges to stimulate demand by giving more money to consumers with steps such as allowances for families with children and abolishing a gasoline surcharge.

The new government also plans to reallocate funds in a 14 trillion yen ($154 billion) extra budget already enacted for 2009/10.


Naoto Kan, the head of a new National Strategy Bureau tasked with overseeing the budget and setting priorities, met on Thursday with new Finance Minister Hirohisa Fujii, 77, and other key ministers to discuss the way forward.

Hatoyama's choice of veteran lawmaker Fujii as finance minister has soothed some concerns about government spending and the debt burden, but the former finance mandarin's clear opposition to stepping into the market to stop the yen's rise moved currency markets even before he was sworn in.

The selection of Shizuka Kamei, the outspoken head of a tiny coalition partner, as minister for banking and market regulation also spooked some investors worried about his opposition to market-friendly reforms.

Hatoyama's Democrats, who have backing from labor unions, have fanned anxiety in business circles long accustomed to having their views heard by the defeated Liberal Democratic Party (LDP).

In a sign that change was in store, Japan's new transport minister said he would review turnaround plans for Japan Airlines Corp, raising uncertainty over what role the new government will play in the carrier's restructuring.

The comments by Seiji Maehara at his first news conference on Thursday came as Delta Airlines and American Airlines hold rival talks to invest in Japan Airlines, as they eye growth in Japan and the rest of Asia.
The U.S.-educated Hatoyama's vow to steer Japan on a more independent diplomatic course has also raised concerns about friction with top ally the United States ahead of his diplomatic debut there next week, when he will meet President Barack Obama.

Secretary of State Hillary Clinton told reporters on Wednesday that Washington was committed to the alliance despite possible friction over defense issues.

This is a new government for Japan. It's a change which is dramatic, given the 50 years of LDP governmental leadership, Clinton said.

But I am very confident that the strength of our relationship and our alliance will stand the test of any political changes, although there will be new policies and new approaches. I think that's only to be expected.

Japan's Foreign Minister Katsuya Okada said late on Thursday Tokyo would not simply extend a naval refuelling mission in support of U.S.-led military operations in Afghanistan, but added Japan should offer some form of support.

He added negotiations should start quickly on problems including plans to reduce the burden of military bases on the southern island of Okinawa, which involve moving a U.S. Marine base out of a town center and redeploying some Marines to Guam.

(Editing by Jeremy Laurence)