That followed a revised 2.4 percent annualised contraction in the third quarter, which was the biggest decline in more than four years.
Economists warn that capital expenditure and overall economic growth are likely to weaken in the first half of this year as exports dwindle and inventories pile up due to a slowdown in global trade.
"Capital expenditure did very well, but we see an increase in inventories in the fourth quarter that points to weak sales," said Shuji Tonouchi, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.
"Falling exports will hit growth in the first quarter. The first half of this year will be weak, but I don't expect a recession."
The revised figure translates into quarter-on-quarter growth of 0.5 percent in price-adjusted terms. This is more than a preliminary reading of 0.3 percent and economists' median estimate of a 0.4 percent.
The capital expenditure component of GDP rose 2.7 percent from the previous quarter, marking the fastest expansion since January-March 2015. That was slower than the median forecast for 2.8 percent but faster than the preliminary 2.4 percent expansion.
The value of inventories rose by 157 billion yen ($1.41 billion) in the fourth quarter, the second consecutive quarter of gains as inventories of raw materials and partially finished goods piled up.
Private consumption, which accounts for roughly 60 percent of GDP, rose 0.4 percent in the fourth quarter, less than the preliminary 0.6 percent increase.
Net exports - or exports minus imports - contributed minus 0.3 percentage point, unchanged from preliminary data.
Domestic demand added a revised 0.8 percentage point to GDP, more than a preliminary reading of a 0.6 percentage point contribution.
Separate data on Friday showed household spending rose 2.0 percent year-on-year in January, more than the median estimate for a 0.4 percent annual contraction, which may ease concerns about domestic demand.
Real wages in January rose 1.1 percent year-on-year in January, matching the same pace of growth in the previous month, the labour ministry said on Friday.
The United States last year imposed tariffs on $250 billion worth of goods imported from China, with Beijing hitting back with duties on $110 billion worth of American products, including soybeans and other commodities.
In a recent sign negotiations to resolve the eight-month trade war were progressing, U.S. President Donald Trump has delayed tariffs on $200 billion worth of Chinese imports.
However, even if the two sides strike a trade agreement, the damage to global trade and Japan's economy may take time to repair with uncertainty about trade policies hurting sentiment and disrupting manufacturers' supply chains. ($1 = 111.5400 yen)
(Reporting by Stanley White; Editing by Sam Holmes) ((email@example.com; +81 3 6441 1984 twitter.com/stanleywhite1; Reuters Messaging: firstname.lastname@example.org))