Japan's economy grew by 0.5% in the three months to December, thanks to healthy exports and stronger than expected demand at home.

The news surprised analysts and economists, most of whom had been expecting the economy to shrink once again.

The stock market in Tokyo surged 1.2% to hit three-week highs on the back of the news.

The dollar slipped slightly against the yen on Friday after the figures were released and as the Japanese central bank left monetary policy unchanged.

Future outlook

Despite the unexpectedly good news, economists were cautious, saying that while the economy may avoid recession, it could expect little more than flat growth this year.

Lehman Brothers economist Matthew Poggi said that stronger than expected consumption and business investment accounted for the surprise rise, adding there was little prospect that the recovery would strengthen this year.

"It's still going to be this kind of near-zero growth, maybe with a contraction. At some point in 2003 we might get a negative quarter," he said.

"Attaining growth for this quarter will be difficult," said Tatsuya Torikoshi, senior economist at Daiwa Institute of Research in Tokyo.

"To sum up the situation, things aren't that good but they aren't that bad either."

The Japanese economy has been sluggish for years, but the economy has now narrowly avoided shrinking for the fourth quarter in a row.

The Nikkei index of leading Japanese shares closed at 8,702 points.