The nation's economy grew 1.9 percent in the January-March quarter — an annualized rate of 7.9 percent — breaking a string of five consecutive quarters of contraction, the Economic Planning Agency said Thursday.

The growth in the gross domestic product surpassed most private forecasts, and Taichi Sakaiya, head of the EPA, said that the economy's decline has stopped.

Still, Sakaiya remained cautious and would not say that the quarter's results herald the beginning of a recovery, adding that joblessness will continue to be the biggest problem ahead.

Meanwhile, many private economists remain somewhat skeptical, and calls for more public spending may continue toward the summer.

For the entire fiscal year to March 31, the inflation-adjusted GDP shrank by a record 2 percent, topping the 0.5 percent contraction in fiscal 1974 during the oil crisis. The drop in fiscal 1998 marked the second year of economic contraction in a row.

"Private consumption grew more than I had expected, and it was the largest factor" behind the "unexpectedly high" growth rate, Sakaiya said at a news conference.

He reaffirmed the government's target of 0.5 percent growth for the current fiscal year to March 2000, noting the figure has now become more believable.

EPA officials said that in theory, the economy could now grow 0.9 percent year-on-year in fiscal 1999 even if there was no growth on a quarter-on-quarter basis.

Sakaiya cautioned that prospects for private consumption are not certain yet.

In fact, the 1.9 percent expansion was supported by massive public works spending. Public investment jumped 10.3 percent in the January-March quarter on a quarter-on-quarter basis and was the single biggest item contributing to the rise in domestic demand.

Corporate capital spending and housing investment also turned positive from negative on a quarter-on-quarter basis, but were still much weaker than the corresponding quarter in 1998.

Sakaiya also noted the economy remains dependent on exports, which means future prospects remain pinned on a recovery in the rest of Asia and a continued boom in the United States.

Overall, domestic demand pushed the GDP up 2.2 percent, while a fall in net exports knocked it down 0.2 percent.

"Frankly, I was surprised," said Hiroshi Sakurai, chief economist at Kankaku Securities Co. "(The growth rate) is about twice the figure I predicted," Sakurai said.

But he cautioned that GDP statistics tends to be strong in deflationary economies.

"You have to be careful. (These figures) do not quite reflect the real situation," he said.

If deflationary factors are excluded, the growth rate comes to 1.2 percent, according to Sakurai.

The GDP in fiscal 1999 could appear even better if deflation deepens, he warned.

He expects calls for a supplementary budget to weaken given the strong GDP figure if superficial. But it is not certain whether that will turn out to be better or worse to the economy, he added.

For the quarter, private consumption, which accounts for some 60 percent of economic activity, increased 1.2 percent, while corporate capital spending gained 2.5 percent.

Ryutaro Kono, a senior economist at Dai-Ichi Life Research Institute, said private consumption was stronger most probably because concerns about the banking crisis have faded.

Kono attributed the rise in corporate capital investment to the government's expanded credit guarantee system for small and midsize firms struggling with the credit crunch.

But he also expressed caution about the current fiscal year, saying, "The growth rate will be somewhere around zero at best" because of decreasing income.

More public works spending may be needed to alleviate unemployment, mainly among blue-collar workers, he argued. Although public works are economically inefficient as often criticized, they are still better than unemployment, he said. Housing investment, boosted by tax incentives for housing loans and low rates on government loans, advanced 1.2 percent.

Total GDP for the January-March period came to an annualized 482.64 trillion yen, compared to 473.52 trillion yen in the October-December quarter.