Figures issued by the government showed that in the three months to June the economy grew 0.6%, well ahead of the 0.2% forecast by economists.

Stock prices responded strongly to the news, as investors piled into property companies and the big banks.

The two sectors are among those worst hit by Japan's decade-long downturn, the one hit by slumping prices and the other burdened by trillions of yen in bad debts.

"It's definitely positive news, and suggests that the expansion is continuing," said Peter Morgan, chief economist at HSBC Securities.

"If anything, things might pick up a bit more in the second half of this year."

Spending turnaround

The good news - which translates into 2.3% growth for a full year, the best showing since the July-September quarter last year - should come as a relief to Prime Minister Junichiro Koizumi.

His term as head of his Liberal Democratic Party is up next month, and good economic news will help him in the election that will decide whether he stays in charge.

The contribution of personal consumption is particularly welcome, since the reluctance of Japanese shoppers to spend has been a key factor in the country's economic travails.

Spending rose 0.3%, helped in part by the fact that hundreds of thousands of overseas trips were cancelled due to the Sars virus which led to money being spent at home instead.

Housing spending was less impressive, falling 0.4%.

But that was more than countered by the renewed willingness of businesses to invest, after years of stagnant business confidence.

Other recent triggers for cautious optimism have included a dip in the number of people out of work, which was registered two weeks ago for the first time in three months.