Japan's economy grew at its fastest rate in 13 years in the last quarter of 2003, helped by a rise in exports to the United States and China.
Japanese prices continue to slide
GDP expanded by 1.7% from the previous quarter, while the economy grew by an annualised 7%, exceeding predictions of 4.6%.
Overseas buyers were particularly keen on Japanese flat panel televisions, digital cameras and cars.
But Japanese prices slumped further in the final quarter last year.
"Deflation is still a huge problem and it is not going away yet," said Barclays Capital economist Mamoru Yamazaki.
"Prices should keep falling through 2004 and perhaps 2005, so that's another two years," he said.
Nominal data which takes into account price trends, showed more subdued 0.7% growth.
Economists say downward prices are eating into corporate profits and increasing companies' debts.
Bank of Japan deputy governor Kazumasa Iwata said in a speech in the
western Japan city of Kobe on Wednesday that GDP figures may indicate the economy is reaching a "turning point".
That could lead to an end of deflation, he said.
But analysts said that although his views are considered more bullish than others on the bank's policy board, the institute is unlikely to reverse its current loose policy.
"I think the BOJ will be extra careful and wait a while before ending their easing stance, even if the economy does very
well throughout the year," said Ryutaro Kono, a senior economist at BNP Paribas.
Another issue is the growing strength of the Japanese yen - which rose by 10% against the dollar in 2003 - as a costly yen can reduce exports.
But the demand for Japanese goods, as well as intervention by the government to rein in the currency, has so far offset the effects of the increase.
Hugh Young at Aberdeen Asset Management in Singapore said Japan's export sector remained strong.
"Throughout the tough years it's been the exporters that have led the way," he told the BBC's Wold Business Report.