The government on Monday upgraded its assessment of the economy due to rising corporate earnings and capital investment, but expressed caution over effects from the looming U.S.-led war on Iraq.

“While the economy has become roughly flat, uncertainty is increasing due to the situation surrounding Iraq,” the Cabinet Office said in the Monthly Economic Report for March.

The government upgraded its economic assessment of the world’s second-largest economy for the first time in eight months.

It said in February, “While movements of an incipient recovery can continue to be seen in some areas of the economy, the state of the economy has weakened somewhat.”

For March, the monthly report says corporate profits are improving and capital spending is showing an incipient recovery, with sectors including general machinery, automakers, real estate and services boosting spending.

The report also warns that the employment situation continues to be severe, with a record-high jobless rate of 5.5 percent in January, while private consumption, which accounts for about 60 percent of Japan’s gross domestic product, remains generally flat.

Exports have become flat, industrial production has declined somewhat, domestic corporate prices have remained flat and consumer prices have declined somewhat.

Looking ahead, the report says the economy “is expected to move toward an incipient recovery if the recovery in the United States and other economies is sustained.”

But “there are growing concerns that the increasing uncertainty and the sluggishness of world stock prices coming from the situation surrounding Iraq may exert downward pressure on final demand,” it says.

Tokyo share prices have continued to log 20-year lows, with the Nikkei average hovering around the psychologically important threshold of 8,000 in recent sessions amid jitters over escalating tensions surrounding Iraq.

But the report says the short-term money market has been stable toward the March 31 end of fiscal 2002, despite the stock market slide.

On the overseas situation, the report says the U.S. economy is recovering but the pace of recovery appears to have weakened recently partly on worsening consumer sentiment.

It also points out that growing concerns over Iraq have sent crude oil prices higher.

Economies in Asia are gradually expanding, with domestic demand in China, Taiwan and Malaysia growing steadily.

The economy is slowing in the 12-member euro zone within the 15-nation European Union, mainly due to worsening consumer and corporate sentiment in Germany, the engine of the European economy.

Japan’s exports to the U.S. have slightly weakened due to drops in auto exports, while those to other Asian economies remain nearly flat.

Exports to the EU remain generally flat but auto exports in the latest models have risen slightly.

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