The December number, though less than analysts' expectations, was even more welcome compared to November when output fell 1.4 percent from October.
The Economy, Trade and Industry Ministry upgraded its basic assessment on production for the first time in 11 months, saying that it "shows signs of having bottomed out," Kyodo News reported.
The new government of Prime Minister Shinzo Abe, which took over in December after its party won a landslide victory in parliamentary elections, has as its top priority bringing Japan out of its chronic deflation and kick starting the economy, which is has been hit by declining exports and a weak domestic demand.
The stimulus measures put in place by the Abe government has helped check the yen appreciation, which should help boost exports. The country suffered a trade deficit of $78 billion in 2012, up 2.7 percent from 2011 after decades of surpluses.
Last Monday, the Japanese government forecast 2.5 percent growth in fiscal 2013 beginning April, citing an improving global economy and its own $220 billion fiscal and monetary stimulus package, which is expected to boost domestic demand.
The government also said inflation is likely to hit 0.5 percent in fiscal 2013, the first such rise since fiscal 2008. The yen is expected to average about 87.8 against the U.S. dollar in fiscal 2013, compared to 81.9 yen in fiscal 2012.