MCM Asia Pacific economist Kenji Arata said the economy remains exposed to the risk of recession despite the fourth quarter data, with capital spending by large-sized manufacturers facing growing downside pressure.
"The improvement in business sentiment has already begun to slow notably, especially among large-sized manufacturers, which had led the recovery of the broader economy," Arata said.
"This will increase the risk that the Japan economy may slip into a recession cycle ... perhaps from around April."
Arata also questioned the sustainability of the increase in capital spending among non-manufacturers, which are still facing sluggish consumer spending and delays in structural reforms.
"Non-manufacturers are not suffering from the recent setback in export demand and they may not cut back capital expenditure as aggressively as manufacturers will.
"However, the setback in export demand may adversely affect domestic demand as well, thereby exerting downside pressure on capital spending even among them."
For his part, Nomura Research Institute senior economist Kiichi Murashima said the recovery in private consumption remains stalled, "while the recovery in private capex was strong."
Murashima said he believes the improvement in capex has spread from information technology to other sectors, especially manufacturing. "My guess is that the recovery in non-manufacturing is actually far better than in manufacturing, even accounting for the slowdown in exports," he added.
Meanwhile, "the statistics for (consumption) as of January were strong, and some for February were also strong," Murashima said. "As far as the first quarter is concerned, we can expect stronger growth in private consumption -- about 0.8 pct quarter-on-quarter and 0.5 pct in GDP."
However, structural difficulties remain.
"The problem is that dealing with these structural problems can create more problems in the short term," he said.
"If the banks really tackle their bad loans, it could put extreme pressure on many companies. But really, this is what is needed for the revival of the Japanese economy."
In these circumstances, the government is likely to introduce a new fiscal stimulus package.
Japan Research Institute economist Makoto Ishikawa said fourth quarter GDP data shows that the economy has seen a slowdown in growth momentum but it remains in a recovery phase.
Ishikawa questioned the sustainability of the growth in capital spending which alone pushed up GDP by 1.1 percentage points in the fourth quarter.
"By the fourth quarter, companies, on the back of strong earnings recovery, were active in investment to take advantage of strong IT demand and to develop e-businesses," he said.