Japan is set on a solid path to growth as its economic prospects have "brightened", according to the head of the International Monetary Fund (IMF).
IMF Managing Director Horst Koehler said Japan may grow 3% this year, ahead of the IMF's previous 2.2% forecast.
Business spending and Asian exports would drive the recovery, he said.
The change of stance follows figures putting growth at an annual rate of 7% at the end of last year - but showing prices were falling faster than ever.
The rise in the value of the yen in recent months means imports are getting cheaper, accelerating the deflation that has dogged Japan for some years.
Backing
Mr Koehler was speaking to the media following meetings with the Japanese economy minister, Heizo Takenaka.
"Japan's economic prospects have clearly brightened," he said, noting the 1.7% expansion in the final three months of 2003 - the fastest GDP growth in 13 years.
"In our view," he said, "the (GDP growth) number goes more to 3%, possibly even beyond that."
He complimented Mr Takenaka's efforts to clean up the banking system, still groaning under the weight of bad debts accumulated largely during the "bubble economy" years of the 1980s.
And he also gave his backing to recent attempts by the Bank of Japan to massage the yen lower by selling the currency - although he warned it was only a temporary measure.
Falling prices
But Mr Koehler also took account of the deflation problem.
Taking into account the slide in prices, growth in the fourth quarter was a rather more subdued 0.7%.
Deflation makes debts bigger and is continuing to hamper the domestic economy, making Japanese consumers reluctant to spend since goods will be cheaper in the future.
The fall in import prices because of the strong yen has been a key driver for recent deflation - a situation which unfortunately also means Japanese exports are more expensive.
Since exports are the main driver of the recovery so far, the fear is that the yen's rise cannot be arrested and the economy could stall once more.
IMF Managing Director Horst Koehler said Japan may grow 3% this year, ahead of the IMF's previous 2.2% forecast.
Business spending and Asian exports would drive the recovery, he said.
The change of stance follows figures putting growth at an annual rate of 7% at the end of last year - but showing prices were falling faster than ever.
The rise in the value of the yen in recent months means imports are getting cheaper, accelerating the deflation that has dogged Japan for some years.
Backing
Mr Koehler was speaking to the media following meetings with the Japanese economy minister, Heizo Takenaka.
"Japan's economic prospects have clearly brightened," he said, noting the 1.7% expansion in the final three months of 2003 - the fastest GDP growth in 13 years.
"In our view," he said, "the (GDP growth) number goes more to 3%, possibly even beyond that."
He complimented Mr Takenaka's efforts to clean up the banking system, still groaning under the weight of bad debts accumulated largely during the "bubble economy" years of the 1980s.
And he also gave his backing to recent attempts by the Bank of Japan to massage the yen lower by selling the currency - although he warned it was only a temporary measure.
Falling prices
But Mr Koehler also took account of the deflation problem.
Taking into account the slide in prices, growth in the fourth quarter was a rather more subdued 0.7%.
Deflation makes debts bigger and is continuing to hamper the domestic economy, making Japanese consumers reluctant to spend since goods will be cheaper in the future.
The fall in import prices because of the strong yen has been a key driver for recent deflation - a situation which unfortunately also means Japanese exports are more expensive.
Since exports are the main driver of the recovery so far, the fear is that the yen's rise cannot be arrested and the economy could stall once more.
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