Tokyo, June 7 (Bloomberg) -- Japan's economy grew last quarter for the first time in a year as exports rose, prompting officials to say the worst of the recession in the world's second- largest economy is over. Gross domestic product rose 1.4 percent, compared with economists' expectations of 1.1 percent growth and a decline of 1.2 percent in the fourth quarter. The rebound may only last one quarter. Economists are forecasting a decline in the second quarter as rising unemployment damps consumer spending and U.S. growth slows. Companies such has Hitachi Ltd. say overseas shipments may not be enough to counter a slowdown in consumer spending, which contributes five times as much to GDP as exports. ``We don't think the economic recovery is strong at this point,'' said Yukiaki Ina, a Hitachi spokesman. While exports of chips and flat-panel computer monitors are ``gradually recovering,'' demand at home isn't. ``At best, we'd see some brightness at the end of this fiscal year.'' Three months of growth won't fix Japan's real problems, economists say. Government debt is approaching 140 percent of gross domestic product, falling prices are undermining company profits and bad debts are starving the economy of credit. ``The banking system still doesn't work, you have the corporate debt problems and capital spending is falling,'' said Takahira Ogawa, head of Asian sovereign debt ratings for Standard and Poor's, which lowered its rating on Japan's yen-denominated bonds to a fourth-ranking ``AA-'' in April. ``We don't think this economic recovery is sustainable.''

Exports
Falling business investment is also weighing on the economy. Spending on factories and equipment fell 3.2 percent in the first quarter after dropping 12 percent in the fourth as companies such as Fujitsu Ltd. slashed costs after record losses last year. That sent bonds futures to the highest this year. The yen fell to 124.43 from 124.13 in New York yesterday. ``The economy is still in a severe condition, but it has already bottomed out,'' Economic and Fiscal Policy Minister Heizo Takenaka said. ``How much business investment we will see this year will be the key.'' From a year earlier, Japan's economy shrank 1.6 percent in the first quarter. In the fiscal year ended March 31, the economy shrank 1.3 percent, more than the government's target of a 1 percent contraction. Net exports -- exports minus imports -- added 0.7 percentage point to GDP growth in the quarter as shipments jumped 6.4 percent, the fastest pace in 21 years, led by chips, cars and steel. The export surge may already be subsiding as growth cools in the U.S., Japan's biggest overseas market. Japanese exports grew in April at the slowest pace this year as U.S. demand slipped. ``The question is whether the economy can keep rising from this point, and the key is whether rising exports can translate into domestic demand, which still lacks momentum,'' said Yasukazu Shimuzu, senior economist at Aozora Bank Ltd.

Consumer Spending
Growth in consumer spending, which makes up 55 percent of the economy, slowed to 1.6 percent last quarter from 1.9 percent in the fourth quarter as Japanese dipped into savings to supplement falling income. Demand may slow further. The economy shed 430,000 jobs in April as manufacturers tried to cut costs and restore profitability. Unemployment was unchanged at 5.2 percent, near a record high, because an even larger number of people stopped looking for work. Automakers reflect the gap between demand abroad and at home. Car exports rose a fourth month in April, led by a 14 percent gain at Toyota Motor Corp., the nation's biggest automaker. Sales at home fell by a ninth month in May.

Bankruptcies
Rising exports helped Toyota post the biggest profit last fiscal year of any public company in Japan. Yet retailers, construction companies and other non-manufacturers, which make up about two-thirds of the economy, depend on spending at home. Banks' efforts to clear trillions of yen in bad loans may curb consumer spending by forcing more companies out of business and vaporizing jobs, economists say. Fujiki Komuten Co., a construction company that had more than 1,000 employees a year ago, filed for bankruptcy this week after UFJ Bank Ltd. and other lenders backed out of an agreement to swap debt for equity. Business spending capped growth last quarter, falling 3.2 percent after a 12 percent drop in the fourth quarter.

Business Spending
While companies expect exports and cost cuts to boost profit this year, that doesn't mean they'll spend more on equipment. ``Improved profits clear the way for business spending, but there will be a time lag,'' said Minako Iida, an economist at Deutsche Securities. ``We can't expect capital spending to pick up at all this year.'' While Daiei Inc., Japan's third-largest retailer, expects to return to profit this year, the company will likely use that money to pay down 1.7 trillion yen in debt rather than invest in new equipment. Construction companies such as Kajima Corp. may do the same. ``Non-manufacturers in particular haven't fixed the problems of the last 10 years -- overemployment, too much equipment and too much debt -- which is going to really drag on recovery,'' said Shuji Shirota, an economist at Dresdner Kleinwort Wasserstein.