Japanese factory output rose less than expected in August, in a sign that companies were feeling the pinch from a strong yen and faltering global demand and the economy's swift rebound from the March 11 earthquake and tsunami was tailing off.

Industrial output rose 0.8 percent in August from the previous month compared with a median market forecast of a 1.5 percent increase and a 0.4 percent gain in July, data from the Ministry of Economy, Trade and Industry showed on Friday.

Manufacturers surveyed by the ministry expect output to fall 2.5 percent in September, but climb 3.8 percent in October.

A purchasing managers' survey for September, which marked the first contraction in manufacturing activity in five months, confirmed that the world's No. 3 economy was losing momentum.

Overall production remains on a recovery trend but the momentum seems to be slowing, partly on weakening external demand, said Yasuo Yamamoto, senior economist at Mizuho Research Institute.

I expect factory output will continue its moderate recovery this year as auto makers are still making up for production delays. But there is a chance that production may weaken after this period is over.

CAUTIOUS OVER OUTLOOK

Output has rebounded sharply from a deep slump caused by the March 11 disaster as companies made strides in mending broken supply chains and factories. The government said production almost reached pre-quake levels, but voiced caution about the outlook.

Both the yen's strength and sagging growth in major export markets in Europe, which is caught in the throes of a sovereign debt crisis, and the United States have raised doubts about the strength of economic recovery in the months ahead.

A bigger-than-expected 4.1 percent annual fall in household spending, weighed down by high energy costs and pessimism about economic prospects, showed consumer spending at home was too weak to pick up the slack.

Friday's data follow a slew of disappointing figures including a smaller-than-expected rise in last month's exports and a surprising drop in retail sales, as well as downward revisions to July output and second quarter GDP.

Japan's auto industry remained one of the few bright spots as auto makers have maintained output to restock inventories overseas and orders yet to be met due to output delays caused by the earthquake. But the IT sector has been hurt by slowing global demand for personal computers and semiconductors.

Toyota Motor Corp, the world's biggest auto maker, said on Wednesday its exports rose 19.8 percent in August from a year earlier, with output in Japan during the month up 11.9 percent.

Japan's economy has emerged from a post-quake recession this quarter, but the bounce driven by retooling of damaged factories and recovering output is petering out faster than previously thought, prompting economists to trim their growth forecasts for the final months of the year.

Fears of a global recession and persistent yen rises have cast doubt on the forecast shared by the government and the central bank that the Japanese economy is picking up, albeit amid heightening uncertainties over the outlook.

The Bank of Japan is expected to ponder whether additional monetary easing will be necessary when it meets for a rate review on October 6-7, after it loosened policy in August to forestall risks to the outlook.

(Additional reporting by Stanley White and Kaori Kaneko; Writing by Tomasz Janowski; Editing by Edmund Klamann)

Japan Tsunami