Defying gloomy expectations, Japan's economy chalked up surprisingly strong growth of 0.5 per cent in the last three months of 2002 thanks to healthy exports and stronger than expected demand at home.
But the rare dose of good news was tempered by the slower pace of the expansion and the data failed to dispel doubts about the sustainability of the now year-long recovery.
Apart from deflation and worries about a war in Iraq, uncertainty also lingered over who the prime minister will select as new head of the Bank of Japan, which continued to frustrate many politicians by leaving monetary policy unchanged.
The government said earlier that gross domestic product in the world's second-largest economy expanded by 0.5 per cent in real terms in October-December to mark four straight quarters of growth since Japan emerged from its worst post-war slump.
That was much better than the average forecast in a Reuters poll of a 0.3 per cent contraction, and translated into annualised growth of two per cent, but it still meant the economy slowed.
GDP grew by 0.7 per cent in the previous quarter and 1.3 per cent in April-June.
Merrill Lynch economist Jesper Koll called the latest figures a "one off wonder", saying the economy was still floundering in deflation now stretching into a fourth year.
The GDP deflator, seen as the broadest measure of price changes in the economy, came in at minus 2.2 per cent for October to December, reflecting relentless falls in consumer prices that have deterred spending by consumers and companies.
"The urgency to appoint a true deflation-fighter at the Bank of Japan is not going to disappear with this report," Koll said.
"Net exports, capital expenditure and consumption... are all pointing south," he said.
Nominal GDP, which does not account for deflation, fell 0.1 per cent on the quarter, showing the economy is still struggling. Real GDP for all of 2002 grew a measly 0.3 per cent.
The rise in GDP keeps Japan from the jaws of another recession, but pressure remains strong on the Bank of Japan to take tougher action against deflation under a new governor that Prime Minister Junichiro Koizumi must select in the coming weeks.
The central bank, which has already cut rates to virtually zero, said it would keep its target volume for current account deposits parked with it at 15-20 trillion yen.
Its only concession to calls for an easier policy was to say it could provide more funds to ensure markets remained stable around the end of the fiscal year next month.
Previously, that option was kept for when risks to financial stability emerged.
Koizumi said he had not yet made his decision on the next BOJ chief, contradicting Finance Minister Masajuro Shiokawa, who said the premier had likely made up his mind.