I have no idea what you mean with the thing freewheeling. I am simply basing my calculations on how these things usually work nowadays. There may be more efficient ways to do it, but that will only generate a factor 10 more energy at best, otherwise you'd be heavily increasing the weight and bulk of the watch.
The only real way to generate energy out of arm movements is by using the change in orientation to shift about the center of mass of some object, after which gravity is going to move this object again. The change in center of mass is limited to the diameter of the watch, and the weight of the shifting object. Suppose you'd have a 22mm watch and a 50g object shifting position then at the very maximum you'd be generating 0.0022*0.050*9.81 = ~1mJ per full 180 degree rotation of the arm. And that's seriously pushing just how far you'd want this to go.
And yeah, those things can run on very little power, but in order for it to be a good watch you'd need the screen to be on 24/7. Even if the screen is small, and most of the displayed graphics are black, that's still going to be a major drain of energy. Much more so than moving one's arm up and down every so often can supply.