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The Japanese government raised its assessment of the economy for the first time in three years on signs the worst of the recession may be over.

“While the economy is in a difficult situation,” the pace of deterioration has “become moderate,” the Cabinet Office said in its monthly report released in Tokyo today, the first upgrade since February 2006. The government last month said the economy is “worsening rapidly while in a severe situation.”

The Bank of Japan also raised its assessment last week and Governor Masaaki Shirakawa today predicted the economy will resume growing this quarter after shrinking at a record pace in the first three months of the year. The government said it was more optimistic about exports and industrial production after companies said they plan to increase output to replenish stockpiles.

“We don’t expect the economy to keep deteriorating at the pace already seen,” said Fumihira Nishizaki, director of macroeconomic analysis at the Cabinet Office. “The economy will be supported by some improvement in overseas demand, inventory adjustments and stimulus packages.”

The Nikkei 225 Stock Average has risen more than 30 percent since it fell to a 26-year low on March 10 freecreditreport. Sentiment among households and merchants improved for a fourth month in April.

The export slump probably eased and production rose for a second month in April, economists surveyed by Bloomberg expect reports to show this week.

Still, the government said it isn’t expecting a full- fledged recovery because unemployment is rising.

“The employment situation is severe and worsening rapidly,” the government said in today’s report, downgrading its assessment for labor conditions.

The jobless rate surged to 4.8 percent in April from 4.4 percent, the biggest gain since 1967, and economists expect a report this week to show that unemployment climbed to a five- year high in April.

“The downward pressure on the labor market will continue to be a downside risk,” Nishizaki said. “The economy is likely to remain in a severe state.”

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