TOKYO (Reuters) - Japan's government took a brighter view of the economy in a report on Friday, thanks to improvements in private consumption and exports, but it warned that Europe's debt crisis and financial market swings could worsen the outlook.
The upgrade, the first since August last year, comes one day after data showed Japan's economy grew faster than the United States, Germany and Britain in the first quarter as subsidies boosted sales of energy-efficient cars.
The more optimistic assessment also acknowledged the economic impact of reconstruction work after a record earthquake devastated Japan's northeast coast in March 2011.
The government lifted its assessment of personal consumption and exports as salaries are slowly rising and exports to the United States and Asia increase.
"The effects of the earthquake have been harsh, but there is reconstruction demand and the economy is slowly recovering," the Cabinet Office said in its monthly economic report for May.
The government said private consumption is slowly increasing as people spend more on cars and travel. In April, the government said consumption has bottomed out.
Exports are showing signs of picking up, the report said. Last month, the government said exports were flat.
The government upgraded its assessment of the labor market, saying things are picking up in areas not affected by the earthquake as companies are increasing overtime pay and youth unemployment is falling.
The Cabinet Office strengthened its warning about Europe's prolonged debt crisis, saying uncertainty is increasing, as speculation mounts that Greece will leave the euro zone.
Japan's economy bounced back in the first quarter from a year-end lull thanks to rebuilding of the tsunami-battered northeast, solid private spending and some improvement in exports.
The world's third-largest economy grew 1.0 percent in the January-March quarter, just above a median forecast of 0.9 percent, data showed on Thursday.
Japan's gross domestic product will expand by 2.0 percent in the fiscal year to March 2013 as government spending on reconstruction gathers momentum, according to a Reuters poll.
(Editing by Richard Borsuk)