Japanese government maintained its upbeat view of the economy in February, saying on Friday the recovery was continuing thanks to rising exports and production, though the strength of the yen needed watching.
Separate figures showed activity in Japan's services industries picked up in December thanks to improved demand at retailers and restaurants, adding to evidence the recovery is taking a firmer hold in the domestic economy.
"The economy is recovering steadily, supported by business investment and exports," the Cabinet Office monthly report said. "Attention should be given to developments in exchange rates in particular."
The comments come after figures earlier this week showed Japan's economy grew at an annualised seven percent in the last three months of 2003, the fastest growth in 13 years.
Exporters have been leading the recovery, helped by strong growth in the United States and China. Domestic industries have lagged, with the exception of makers of digital products such as liquid crystal display televisions, for which demand is strong.
The Cabinet Office report said there were signs of a recovery in employment conditions, with the latest statistics showing fewer people were out of work in December.
This has helped private consumption, which accounts for over half of Japan's economy and is showing signs of recovery.
Those signs were evident in figures on Friday showing that Japan's tertiary sector index, a measure of activity in service industries, rose 0.2 percent month-on-month, slightly below a forecast in a Reuters poll of a 0.3 percent gain.
The figures "suggest the surge in manufacturing activity, fuelled by external demand, also had a positive effect on the non-manufacturing sector," said Ryo Hino, an economist at J.P. Morgan.
"We expect global demand to continue growing moderately, which means domestic industrial production is likely to follow a similar pattern," he said, adding that this would in turn have a mildly positive impact on non-manufacturing activity.
A pickup in non-manufacturing is vital to the sustainability of Japan's recovery as it could help offset any external shocks that may cut exports. One such problem has been the strength of the yen.
Japan has sold some 27 trillion yen ($252.3 billion) since January 2003 intervening in currency markets in an attempt to hold down the yen, fearing its effects on exporters' profits.
At home, deflation remains a problem, the Cabinet Office said, noting that while higher raw materials prices on world markets were pushing up the corporate price index, consumer prices were still falling.
In the October-December quarter of 2003, both the tertiary and all-industries indices rose 1.2 percent over July-September, confirming that the quarter as a whole was stronger than figures for individual months might have suggested.