JAPAN'S economy offered more signs of recovery from the deadly March earthquake yesterday, but Moody's ratings agency warned both growth and government action may fall short of what is necessary to bring Tokyo's ballooning debt back under control.

Industrial output rose 1 percent last month after a record plunge immediately after the 9.0 magnitude quake and a tsunami it set off, and companies said they planned to crank up output further in May-June, bringing it close to pre-disaster levels.

The upbeat outlook spurred talk that the world's third-largest economy could be poised for a V-shaped recovery after the disaster knocked Japan back into its second recession in three years and a third downturn in a decade.

Tokyo stocks rose 2 percent, buoyed by the forecasts, which were backed by a manufacturing survey showing a turnaround in May. The yen dipped after the Moody's warning and provided shares of exporters some extra support, while government bond yields inched up.

However, manufacturers' optimism failed to impress Moody's which yesterday put Japan's sovereign debt on a watch for a possible downgrade. It cited huge costs of dealing with the quake's aftermath and concerns that the government's response to economic challenges may prove inadequate.

"The much larger than initially expected economic and fiscal costs of the March 11 earthquake are magnifying the adverse effects imparted by the global financial crisis from which Japan's economy has not completely recovered," Moody's said.

The ratings agency cut Japan's outlook to negative in February and moved one step closer to a possible downgrade by putting its Aa2 rating on review.

Japan has been mired in economic stagnation for much of the past two decades and its repeated efforts to jolt the economy back to life with stimulus spending propelled public debt to twice the size of its US$5 trillion economy.

Moody's voiced doubts the Japanese economy could grow fast enough to cut fiscal deficits and warned political infighting could scupper tax and social security reforms needed to stabilise public finances.

Prime Minister Naoto Kan, who has been sharply criticized for his handling of the crisis at the crippled Fukushima nuclear plant, faces a no-confidence vote and a deepening rift in his own party and analysts are more pessimistic than ever that any substantial reforms were possible.

"The government intends to introduce a comprehensive tax reform program in June. However, Japan's divided Diet ... and the intensifying level of political challenges to Prime Minister Kan together continue to threaten to bog down such efforts," Moody's said.

Although Tokyo faced no immediate risk that borrowing costs would spike up, the buildup of debt could not go on forever and at some point would reach a tipping point where markets would start demanding higher premiums for lending to Japan, Moody's said.