Japan 's economy grew faster than initially reported in the final quarter of 2016, with an upward revision in business spending and a jump in investment growth bolstering activity.

Asia's second-largest economy grew at an annualized rate of 1.2 percent in the October-December quarter, revised up from a preliminary reading of 1.0 percent growth, according to new data from the Cabinet Office.

However, the revised figure still undershot market estimates: The median estimate in a Reuters poll of economists had pegged growth at 1.6 percent.

On a quarter-on-quarter basis, gross domestic product (GDP) rose 0.3 percent, versus a preliminary reading of 0.2 percent growth and the median estimate of a 0.4 percent increase.

The latest round of modest data confirms the challenges facing Japanese policymakers, who have been working to support growth and boost inflation after years of economic stagnation.

Japan's economy has grown for four consecutive quarters, a feat not seen in three years, but experts say business investment and private consumption remain soft.

"I think markets were looking for a bit more of a broad based lift," Vishnu Varathan, Senior Economist at Mizuho Bank told Squawk Box.

"Capex exceeded market expectations, while the other components didn't rise to the occasion, so to speak. Household consumption remains weak, and net exports did contribute but it was not stellar."

BOJ Policy Response

As Japan's economy progresses on a slow and gradual recovery trend, former Bank Of Japan (BOJ) board member Sayuri Shirai expects the central bank to remain "constant" at its March 15-16 monetary policy meeting.

"The corporate sector is very cautious of making an investment, mainly because there is a great deal of uncertainty both externally and domestically, because of the declining population. The corporate sector is not very eager to make greater production capacity," she told The Rundown on CNBC.

Professor Shirai was a member of the Policy Board of the Bank of Japan from April 2011 to March 2016. She supported the BOJ's Quantitative and Qualitative Monetary Easing (QQE) program in 2013 and 2014, but voted against the negative interest rate policy in January 2016.

"The important thing is that we see continuous nominal wage growth, together with higher expectations on wage growth. Corporate sector profits are very high historically, but the impact on wages is still limited," she said.

The capital expenditure component of GDP rose 2.0 percent from the previous quarter, which was more than the forecast for 1.7 percent growth, and faster than the preliminary 0.9 percent. Despite the optimism, private consumption registered no growth in October-December and sluggish household spending remains a key challenge.