* China investment surges, adding to recovery hopes
* Japan Q1 GDP record low, slow rebound seen
* China May exports, imports fall more steeply
* Australia employment down less than expected
* Mounting deficits spark jitters about U.S. economy
By Jason Subler and Hideyuki Sano
BEIJING/TOKYO, June 11 (Reuters) - Chinese investment surged in May, adding to hopes the world's third-largest economy may lead a recovery, but confirmation of a record slump in Japan's first-quarter GDP reinforced expectations its rebound from recession will be slow.
China's investment pick-up, which comes on the back of large government stimulus spending, offset surprisingly weak figures for exports and imports, which both fell for a seventh consecutive month and at an accelerating pace.
There was positive news from Australia, where a smaller-than-expected fall in employment built on hopes the country, which has so far dodged falling into recession, will see an economic revival sooner than other developed nations.
Global data in recent weeks has pointed to a rebound from the deepest recession in six decades, driving stock markets sharply higher from a March trough, but worries about the ballooning U.S. trade and budget deficits hang over the nascent recovery.
U.S. Treasuries edged up in Asian trade, after the benchmark 10-year yield advanced to 4 percent overnight, the highest since Oct. 16, on concern about how expensive it will be for the U.S. government to finance its growing budget deficit.
"The risk of rising yields should not be discounted," said Joseph Brusuelas of Moody's Economy.com. "If continued, they will reduce home mortgage refinancing and curtail corporate borrowing, both critical to an economic recovery."
U.S. May retail sales data and weekly jobless claims, both due at 1230 GMT, may give more clarity on the health of the world's largest economy.
STIMULUS PLAN
China has sought to cushion the blow from falling exports with a 4 trillion yuan ($585 billion) economic stimulus plan.
Data on Thursday showed annual growth of fixed asset investment in urban areas in the January-May period accelerated to 32.9 percent. from 30.5 percent in the first four months of the year, suggesting the stimulus is working.
"I think this is a welcome sign of momentum building in the Chinese economy, and it's good for the global outlook," said David Cohen of Action Economics in Singapore.
Underpinned by this optimism, commodity-related stocks in Asia rose for a third straight day while oil prices extended gains to seven-month highs.
The need for government pump-priming was underlined by May customs data that showed exports fell 26.4 percent on the year, while imports fell 25.2 percent, resulting in a trade surplus of $13.4 billion, compared with $13.1 billion in April and $18.6 billion in March.
"I've always been pretty conservative with China's import and export forecasts, and I think they haven't reached a bottom yet, because the U.S. and European economies are still deep in recession," said Sherman Chan of Moody's Economy.com in Sydney.
However, she also noted that trade flows today reflect orders placed several months ago, when the global economy was in dire straits. Investment, by contrast, is a better leading indicator.
Japan's economy contracted a revised 3.8 percent in the first three months of the year, not as bad as economists' median forecast of 4.0 percent, which was the same as the initial estimate, but still the fastest pace since World War Two.
Economists are forecasting a gradual return to growth, although weak capital spending and personal consumption are expected to be a drag on the economy in the coming months.
"The revision was technical and doesn't change the overall picture," said Hiroshi Watanabe, senior economist at Daiwa Institute of Research. "The economy has passed the worst phase but it is unlikely to return to peak levels before the global crisis."
JOBS BOOST
In Australia, the currency climbed while bonds slid after data showed only a net 1,700 jobs were lost last month, compared with an expected drop of 30,000.
That followed a rise of 25,400 in April and left employment down just 9,400 so far this year. The United States has shed 2.9 million jobs in the same period.
"Another very good result and a very positive development," said Michael Blythe, chief economist at Commonwealth Bank, adding that the rosier outlook meant the central bank was likely to leave interest rates untouched at a record low 3 percent for now.
South Korea's central bank said Asia's fourth-largest economy had hit bottom, but warned that oil prices were fuelling inflationary pressures, sparking a plunge in bond futures.
The Bank of Korea held interest rates at a record low of 2 percent for a fourth consecutive month, as expected, and said it was uncertain if the country would return to growth at pre-crisis levels quickly.
In the United States, the federal budget deficit logged a bigger-than-expected $189.7 billion in May, the U.S. Treasury reported on Wednesday. The nation's trade gap also widened to $29.2 billion in April, another report showed.
The yawning deficits renewed investors' fears that massive government spending will lead to dangerous inflation and undercut any fledgling rebound.
A government bond auction pushed yields on the benchmark 10-year Treasury note above 4.0 percent for the first time in eight months, suggesting investors want the government to pay a premium to finance its huge deficit.
"It's hard to envisage that the Fed will raise interest rates anytime soon given the economic fundamentals, but on the other hand there are supply concerns in the U.S.," said a foreign exchange dealer at a Japanese bank. (Writing by Alex Richardson; Editing by Jan Dahinten)