JAPAN'S economy, the world's second-largest, will expand at a faster pace in the current fiscal year than previously forecast as robust exports to Asia and improving corporate earnings are underpinning a broadening recovery.

The Cabinet Office said yesterday Japan's gross domestic product will rise 2.6 percent in the year to March 2011, faster than an earlier estimate of 1.4 percent.

"The upward projection was due to brisk growth in exports, especially to Asia. The forecast was also upbeat thanks to a recovery in capital spending and improving corporate earnings," said Takashi Hanagaki, from the Cabinet Office.

Japan's economy has emerged from last year's recession - the worst since World War II - thanks to a recovery in exports, which alone account for 10 percent of Japanese GDP.

"The global economic recovery was stronger than expected, helping boost Japanese exports," said Hiroshi Watanabe, an economist at Daiwa Institute of Research.

Brisk Asian demand is vital to Japan's exports. Asia alone accounts for over 50 percent of total Japanese exports. Strong Asian demand is leading to higher production, investment and profits at Japanese companies.

Earlier in the month, Japan upgraded its economic growth in the January-March quarter to an annualized pace of 5 percent from 4.9 percent.

But the encouraging figures, including yesterday's upward GDP revision, are tempered by persistent deflation and other negatives, including a lackluster labor market.

Falling prices may boost purchasing power, but deflation is generally bad for an economy. It plagued Japan during its "Lost Decade" in the 1990s, hampering growth by depressing profits, sparking wage cuts and causing consumers to postpone purchases.

Japan is also one of the most indebted countries in the world. Its public debt reached 218.6 percent of GDP last year, according to the International Monetary Fund.

Tackling the ballooning national debt is among the most pressing tasks for Japan's new Prime Minster Naoto Kan.