Output at Japan's factories and mines jumped 4.6 per cent from the previous month, the biggest climb since January 1997, boosted by vehicle production and some seasonal factors, the Ministry of International Trade and Industry (MITI) said in its latest monthly report.

This was above the average forecast of a 3.7 per cent in a Reuters survey of economists this week and at the high end of the 11 forecasts.

But the ministry lowered its forecast for this month's manufacturing output to a 1.3 drop from an original 0.2 per cent rise and predicted a further 0.7 percent dip in October.

"Production and shipments appear to be improving but the prospects for continued recovery in final demand are uncertain and will continue to require a close watch," the ministry said in its report.

This was animprovement from the previous monthly report, in which the ministry had said only that production and shipments were hitting bottom.

But an official expressed concern that after a time lag of several months, the high yen will hurt Japan's exports and that another worry was the possibility that support from government policy measures would fade.

The data also did not reflect last week's earthquake in Taiwan, a major competitor for Japan's semi-conductor producers.

Separately, the finance ministry's regional finance bureaux said economic conditions nationwide remained severe but were improving somewhat thanks to government policy measures.

The report said that for the Kanto region, centred on Tokyo, it would take more time for private demand to recover fully as worries remain over severe income and job conditions and the effects of a recent rapid rise in the yen on corporate profits.

The yen is up some 16 per cent from its year lows hit in Mayand, at around 106 yen to the dollar on Wednesday, isstronger than the August average of around 113 yen, according to Reuters graphics data.

The yen has surged since the Japanese economy began showing signs of growth in early June, as foreign investors have poured money into yen assets in the belief that the world's second biggest economy was finally pulling out of its worst postwar recession.

But the yen's rise has alarmed the government, which fears it will thwart the nascent recovery by eroding the yen value of Japanese companies' overseas earnings and inflaming deflationary pressures on the economy.

Japan promised at a weekend meeting of the G7 industrial powers that it would continue policies to support the economy until a recovery led by private demand was in place in return for a G7 statement of shared "concern" over the yen.

On the fiscal side, the government on Wednesday approved plans to spend an already-budgeted 500 billion yen on high-speed trains, airports, telecoms infrastructure ands other products.