Japan's industrial production unexpectedly fell in April from the previous month, adding to concern that output growth may be losing momentum on a slowdown in U.S.-bound exports, and nudging up euroyen futures.
But the data did little to change market expectations that the Bank of Japan will raise interest rates around August to keep on top of inflation.
Output fell 0.1% in April from March, government data showed on Wednesday, compared with a consensus market forecast for a 0.5% increase.
"The data is slightly weaker than expected. It is mainly due to continuing inventory adjustments in the electronics devices sector and slowing exports to the United States," said Takumi Tsunoda, an economist at Shinkin Central Bank Research Institute.
"As long as output grows in April-June, it would not delay any rate hike decision by the Bank of Japan," he added.
Manufacturers' output, the core component of production, is expected to rise 1.8% in May and to rise 1.4% in June, the data from the Ministry of Economy, Trade and Industry showed. The ministry stuck to its assessment of industrial output, saying it is on a moderately rising trend.
Industrial output fell in the January-March quarter, although many economists saw it as a temporary adjustment after strong growth in the previous quarter.
Economists expect output to remain firm as Japanese companies continue to reap benefits in Asia and Europe, but some economists are concerned that a slowdown in the United States could dent U.S. demand for goods and hurt Japanese economic growth.
Exports to the United States, Japan's largest export destination, fell 4.8% in April from a year earlier, marking the first decline in more than two years, Japanese trade data showed last week.
"From the Bank of Japan's perspective, the biggest downside risk remains U.S. economic performance and the IT sector," said Naoki Iizuka, senior economist at Mizuho Securities.
The lead euroyen futures contract inched up after the data. The December contract rose 1.5 basis points to 99.035, moving away from a nine-year low hit the previous session when surprisingly upbeat figures on jobs and household spending reinforced the view that the BOJ could raise rates as early as the July-September quarter.
The BOJ has kept monetary policy on hold since raising the key policy rate to a decade-high 0.5% in February, which was the first rate hike since July last year.
The central bank has said it will raise rates gradually because keeping low rates for too long even as the economy recovers could hamper sustained long-term growth and cause misallocation of funds and resources.
"Today's data does not change our expectation that the next interest rate hike will come sometime in July-September," Tsunoda said.
Japan is currently enjoying its longest period of expansion in the postwar era, albeit at a slower pace than during previous growth phases.
Economic growth slowed to an annualized 2.4% in January-March from 5.0% in the previous quarter partly due to a drop in capital spending.