Japan's economy grew 0.9 percent in the last quarter of 2007, double the expected rate, but a likely slowdown this year meant analysts still saw the Bank of Japan keeping interest rates on hold in 2008, or possibly cutting them.
The quarterly growth was much stronger than the expected 0.4 percent rise, due to strong capital expenditure and exports, government data showed.
The bullish growth -- an annual pace of 3.7 percent compared with an annual growth rate of just 0.6 percent in the United States in the October-December quarter -- pushed Japanese stocks up 3 percent and sent bonds lower amid hopes that Japan might avoid a recession.
But economists said the growth might be the last hurrah for the economy before it turned down in 2008.
"The figures were strong but it is unlikely the Bank of Japan will change the direction of its policy decisions," said Yasuhiro Onakado, chief economist at Daiwa SB Investments. "The Bank of Japan will likely keep open the option of keeping the current interest rate levels or even rate cuts as situations got a lot worse since January and on growing uncertainty about the economy."
The data follows a pessimistic outlook from financial chiefs in the Group of Seven industrialized countries when they met in Tokyo on Saturday, amid fears of a recession in the United States in the wake of the credit crisis.
Investors expect the BOJ to stand pat on rates at its policy review on Friday, when it is expected to assess the slowing U.S. growth and fallout from the deepening credit crisis.
Japanese government bond futures fell nearly half a point on the upbeat growth figures, but financial markets are still flirting with the idea of a BOJ rate cut.