The latest and better than expected gross domestic product report underscores that the economy continued to recover from the worst recession in decades in the fourth quarter of 2009 and signaled a lessened possibility that a double-dip recession will occur.

This may be encouraging news for the Democratic Party of Japan-led government, which is suffering from falling support rates ahead of the Upper House election in July.

But analysts warn that the pace of economic growth could slow prior to the July election because the impact from stimulus measures mapped out by the previous government is expected to wane.

Voters may not be feeling the economic improvement signaled by the latest GDP figure — an annualized real 4.6 percent expansion in the October-December period — as wages are continuing to decline amid prolonged deflation and more graduates are struggling to find work.

“The figure (for percentage growth) shows the economy is improving backed by stimulus measures and exports, but individuals have yet to reap much benefit from it,” said Takahide Kiuchi, chief economist at Nomura Securities Co.

Despite three straight quarters of expansion, GDP still stood at around ¥530 trillion for October-December, about ¥30 trillion lower than the level in early 2008 before the collapse of Lehman Brothers Holdings Inc.

“Although the risk that Japan could fall into a double-dip recession has sharply diminished, there is still a high possibility the nation’s economic growth may stall in early 2010,” Kiuchi said, citing fading stimulus effects and a possible slowdown in exports due to a deterioration in overseas economies and a strong yen.

During the October-December period, GDP expanded 1.1 percent from the previous quarter as consumer spending continued to perk up on the back of stimulus measures, including government incentives for the purchase of greener consumer appliances and cars.

Corporate capital investment also revived amid a recovery in exports.

But public investment decreased as the previous government, led by the Liberal Democratic Party, front-loaded public works projects to early fiscal 2009 to cope with the economic downturn, and Prime Minister Yukio Hatoyama’s administration later canceled some of the remaining projects.

The DPJ-led government hopes to stimulate domestic demand by providing more cash to households, instead of devoting trillions of yen to big public works projects. It pledged during last summer’s election to provide a monthly allowance for each child of junior high school age or younger, and to introduce free high school education.

Kyohei Morita, chief economist at Barclays Capital Japan Ltd., said any measures that boost household disposable income would be positive for consumption.

“But it would be unlikely to lead to a sustainable recovery in consumption unless companies or employers revive and people feel secure about future employment and income conditions,” he said.

Morita added that in the future it may be difficult to expect a “self-sustaining” recovery led by domestic demand in Japan, where the population is graying and companies are willing to relocate plants to overseas markets.

“It will be very important for Japan to boost exports more than other countries, and to that end the government needs to put more emphasis on strengthening businesses, not households,” Morita said, adding a cut in corporate tax would be one step to help sharpen companies’ competitive edge in international markets.

Hideki Matsumura, a senior economist at Japan Research Institute Ltd. who expects GDP to fall into negative territory in the first half of 2010, called on the government to put more emphasis on nurturing exports other than cars and electronics.

“The current economic measures are too one-sided,” Matsumura said.

There is considerable room for growth in exports of agricultural products and high-quality services, as well as in strengthening tourism in the country, he said.

The effects of the stimulus will fade sooner or later, he said. “Graying Japan needs to seek recovery by benefiting from overseas demand.”

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