TOKYO - Japan is showing signs of a recovery with factory output picking up, the finance ministry said Tuesday, upgrading its assessment of the world's second largest economy.

The economy is "in a severe situation but recovery signs are seen in some sectors such as an upturn in production activity," the ministry said.

The assessment was more upbeat than a previous report three months ago that had said the downturn was "coming to a halt" in some sectors.

Japan crawled out of a year-long recession in the second quarter of 2009, but exports and factory output are much lower than before the global financial crisis began and unemployment is close to a record high.

The Bank of Japan also said this month the economy "has started to pick up".