Japanese factory output edged up in July but manufacturing activity in August expanded at its slowest pace in more than a year, suggesting that companies were starting to feel the pinch from an export slowdown and a strong yen.
Manufacturers surveyed by the government expect output to rise 1.6 percent in August, less than a 2 percent gain forecast a month ago, boding ill for the already slowing economy.
The yen has remained stubbornly high despite government efforts to talk it down. The Bank of Japan's decision to boost its cheap loan scheme at an emergency meeting on Monday also did little to weaken the yen, which is hovering near a 15-year high against the dollar hit last week.
Japan's economy isn't worsening but the pace of recovery is clearly slowing. We will likely see output growth slow significantly, particularly in the fourth quarter when the effects of the yen's rise start to appear in full, said Takeshi Minami, chief economist at Norinchukin Research Institute.
If the economy is performing as it is, the Bank of Japan will continue to come under pressure to ease monetary policy further.
Industrial output rose 0.3 percent in July after a 1.1 percent drop in the previous month, data from the Ministry of Economy, Trade and Industry showed on Tuesday. The median market forecast was for a 0.2 percent decline.
The ministry's survey of manufacturers pointed to an increase of 0.2 percent in September after August's expected rise of 1.6 percent.
The Nomura/JMMA Japan Manufacturing Purchasing Managers Index (PMI) fell to a seasonally adjusted 50.1 in August from 52.8 in July, the lowest level since 48.2 in June 2009.
The index remained above the 50 threshold that separates contraction from expansion, however, for a 14th consecutive month.
Japan's economic growth slowed to a crawl in the second quarter as exports to the United States and China ebbed and stimulus-driven consumption petered out.
Annual export growth slowed for a fifth straight month in July, trade data showed, as slowing overseas demand threatens to inflict more pain on the export-dependent recovery.
(Additional reporting by Kaori Kaneko; Editing by Edmund Klamann)