Optimism, which has been a very rare commodity in Japan over the past decade, seems to be suddenly heading towards a surplus, with economists, the central bank and the government giving highly glowing assessments of the nation's economy over the past few weeks. 'Everyone is coming around to this optimistic attitude, with even [Bank of Japan] governor [Toshihiko] Fukui hinting that we are now beginning to see external demand back on track,' said Stefan Worrall, an economist with Credit Suisse First Boston. 'When that is in tandem with domestic demand, in which we have seen a surprisingly strong recovery, then they are going to fuel each other in a double-barrel recovery. We have not seen anything like it in Japan since the end of the bubble era. 'There are, of course, some major risks still involved,' he cautioned, pointing to rising global demand for oil and sharp price rises, as well as questions over whether the US Federal Reserve will accelerate interest-rate increases and the effect that will have on domestic consumption and, hence, external demand as it relates to Japan. 'But that risk is much less when the demand is twin-engined,' Mr Worrall said. 'In truth, it's hard to see any downside at the moment; either the recovery will be domestic-demand-driven or it will be enhanced with the external demand.' Heizo Takenaka, minister of economic and fiscal policy, pinned the pick-up in a recovery that has been noticeable since early 2002 - but had stagnated for about nine months - on rising exports, increasing personal spending and progress in adjustments in the information technology sector. 'We believe the economy has now emerged from the standstill,' he told a press conference early this week. . In its August economic assessment, the Cabinet Office predicted that corporate sector resilience would continue to extend into the household sector. The stock market was quick to jump on the good news, with the Nikkei-225 Index leaping more than 1.35 per cent to a four-year high of 12,263.32 yesterday. In addition, 80 per cent of companies that responded to a poll by Kyodo News said they were confident the recovery would gather pace over the next six months. The majority also expected a rise in profits. Another positive indicator is falling office vacancies in Tokyo. Office vacancies for the five main business districts of the capital are at a 3?-year low as companies expand, according to a report by private brokerage firm Miki Shoji. The domestic optimism is apparently infectious. The International Monetary Fund this week raised its economic growth outlook for Japan this year to 1.8 per cent on the basis of improved personal consumption figures and private capital investment. The same factors prompted Tokyo to make a slightly more conservative prediction of 1.6 per cent. And arguably the most significant impact of all the good news is that the economy should be able to escape from the deflationary spiral that has afflicted it, according to Takuji Aida, chief economist with Barclays Capital. 'We're very optimistic because until last year, the Japanese economy was being affected by external factors but domestic demand is becoming stronger and stronger and now employment statistics are getting better as well,' he said. Mr Aida expects unemployment to fall below 5 per cent by the end of the year, from a peak of 5.5 per cent. 'Thanks to the domestic demand, we believe the deflationary gap will end by next year at the latest, and that stocks will broadly recover.' All this in spite of what Mr Worrall describes as the ongoing 'political shenanigans'. 'The election on September 11 is obviously a very symbolic battle between the old and new over political and structural reform, but a lot of those reforms have already gone past the point of no return,' he said, pointing to the example of banks writing off their huge non-performing loans in recent years. 'We have seen the benefits of the changes take hold already, particularly in the first quarter of the year, and they can only go forward irrespective of the political situation.'