Japan raises outlook, North Korea raises risk concerns

By Patricia Zengerle

WASHINGTON (Reuters) - Japan raised its economic outlook for the first time in three years on Monday, and an important measure of German business sentiment rose in May, in further signs the worst of the global recession may be over.

But news of North Korea's second nuclear test, of a significantly more substantial device than in a first test in October 2006, stoked geopolitical concerns, hitting the yen on a day markets were quieted by holidays in Britain and the United States.

European shares .FTEU3 closed slightly higher, with by Sanofi Aventis leading pharmaceuticals higher after winning a U.S. contract. Oil dipped toward $61 a barrel. And Canada said its federal deficit this year will be "substantially more" than the $30.1 billion (C$33.7 billion) predicted in January.

North Korea's nuclear test was condemned by global leaders and triggered an emergency U.N. Security Council meeting.

"North Korea's nuclear and ballistic missile programs pose a grave threat to the peace and security of the world, and I strongly condemn their reckless action," U.S. President Barack Obama said.

Analysts said the test was more a negotiating tactic than an imminent threat to security on the peninsula. European and Asian stock markets generally shrugged off news of the nuclear test, as investors focused on company news in thin trading.

In one piece of news taken as a sign of thawing in financial markets, India's top mobile telephone operator, Bharti Airtel (BRTI.BO), and South Africa's MTN Group (MTNJ.J) have revived merger talks to create a $61 billion telecoms giant spanning Africa, Asia and the Middle East.

German think tank Ifo's business climate index, based on a poll of 7,000 firms, rose to 84.2 in May from 83.7 in April but below a consensus forecast for 85.0, cheering investors even as it underscored the weakness of current business conditions.