Japans economy grew faster-than-expected in the fourth quarter with a stimulus-fuelled rebound in domestic demand and corporate investment.

Growth of 1.1 per cent between October and December, compared to the third quarter of 2009, was the fastest since a 1.3 per cent expansion between April and June 2009 and translated into an annualized rise of 4.6 per cent, beating a 3.7 per cent forecast.

However, the government, analysts and investors drew little comfort from the figures. They are still worried that deflation is not being tackled and that the economy could slow again this year. Over 2009, the economy contracted by 5 per cent.

Markets focused on the record 3 per cent annual fall in the GDP deflator as a sign that the large gap between supply and demand was pushing Japan deeper into deflation.

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Domestic demand was the economys brightest spot in the fourth quarter, adding 0.6 of a percentage point to GDP growth, the first positive contribution in seven quarters.

However, economists said that momentum was likely to fade, citing the dwindling impact of stimulus introduced by a previous government and uncertainty over how quickly the new administration would boost consumption.

Government officials have been pushing the Bank of Japan to do more to fight deflation.

Naoto Kan, Finance Minister, said today that the Government could not be optimistic about the economy even though the risk of another recession had receded.

Japans Nikkei lost 78.89 points, or 0.78 per cent, to 10,013.3. Hong Kong and Chinese stock markets are closed today and tomorrow for the Lunar New Year holiday.