TOKYO (

TheStreet

) -- Japan's economy grew at an annualized rate of 3.7% in the second quarter, the Japanese government reported today. And depending upon whether you're a sake-glass-half-full or sake-glass-half-empty type, this is either news that the world economy is recovering from the international recession -- or it's an economic chimera buoyed by one-time stimulus measures.

According to the Japanese government, the April-June recovery was driven by a robust demand for exports such as video recorders and other electronics goods. Shipments to China and other emerging markets were particularly strong. Exports grew 6.3 percent from the previous quarter, the highest growth since the second quarter of 2002.

Government stimuli -- such as cash handouts and incentives to buy ecological products -- also helped bolster the domestic economy.

Regardless, Japan's domestic demand remains weak. The nation's unemployment rate has risen to a six-year high of 5.4 percent as companies such as

Toyota Motor

(TM) - Get Report

and

Sony

(SNE) - Get Report

have laid off thousands of workers. During the second quarter, employee compensation also fell by 1.7 percent.

Japanese private capital investment slid 4.3 percent from the previous quarter, while housing investment plunged 9.5 percent, the government said.

"When you look at the numbers, the contrast between external demand and internal demand is as clear as night and day," said Hiroshi Watanabe, economist with Daiwa Institute of Research in Tokyo. "With payments falling, it's really hard to expect individual spending to hold up."

The rebound in the world's second-largest economy came after a yearlong contraction in gross domestic product. The final quarter of 2008 was particularly horrific, with the Japanese economy shrinking at a 13.1% pace.

No nation, of course, is an island -- not even an island nation. Which helps to explain the tumble that the Japanese markets experienced today despite the headline-grabbing positive numbers. The

weak U.S. consumer sentiment report

released Friday is especially troublesome for the Japanese export-driven economy.

In the U.S. Friday, the Dow Jones industrial average fell 76.79, or 0.8 percent, to 9,321.40 after falling as much as 165 points after the consumer sentiment survey was released. U.S. futures pointed to more losses Monday. Today, Japan's Nikkei 225 stock average tumbled 279.23 points, or 2.6 percent, to 10,318.10.

ADRs of

Nissan Motors

(NSANY)

,

Canon

(CAJ) - Get Report

and

Nintendo

(NTDOY.PK)

were all in the red in Monday's early morning trading, albeit slightly, down 0.6%, 1.1% and 0.2%, respectively.

Honda Motors

(HMC) - Get Report

, however, was up on the day, by some 0.8% to $32.20.

Likewise, Hong Kong's Hang Seng dived 2.8 percent to 20,313.46, while Shanghai's benchmark lost 2.8 percent to 2,963.09. Korea's Kospi dropped 1.6 percent in 1,565.49 and India's Sensex shed 1.8 percent. Markets in Taiwan, Australia and Singapore fell back over 1 percent.

Underscoring the downside of the report, Japan's economy and fiscal policy minister Yoshimasa Hayashi took to the airwaves to warn that economic "risk factors" remain, including high unemployment and sluggish production. "Production is still at a low level, and worries remain that employment conditions will worsen," Harashi said on nationally televised news. "So we must watch the downside risks."

-- Written by Ty Wenger in New York

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