Japanese industrial production fell less than expected in February, but the second monthly decline in a row did little to disperse clouds building over the economy.
The widely watched indicator, seen as key to Japan's growth outlook, did not alter market views that the Bank of Japan may be forced to cut interest rates this year.
Another survey, covering purchasing managers in March, also showed manufacturing activity in Japan contracted.
A 10 percent rise by the yen against the U.S. dollar this year has raised concerns Japan's big export industries may suffer, but a government official said manufacturers had not reported a major impact on production yet from the yen's jump to 13-year highs.
"Looking ahead, it is difficult to say whether output is just going through a soft patch or in a downward trend when there is also a possibility that export growth could lose steam," said Takeshi Minami, chief economist at Norinchukin Research Institute. Industrial output fell 1.2 percent in February, the economy ministry said, compared with a consensus market forecast for a 2.1 percent drop, as production was firmer than expected among makers of machines and chemical products.
Manufacturers said they expected their output, the core component of production, to rise 2.0 percent in March but to decrease 1.0 percent in April.
Markets showed little reaction to the data but economists warn a faltering U.S. economy has slowed down assembly lines at many Japanese factories as exports to the United States have declined for the past six months.
So far, strong exports to Asia, Europe and other developing countries have cushioned the blow and helped keep the Japanese economy growing until the last quarter of last year.
Still, there are lingering concerns that the U.S. subprime housing crisis, coming on top of soft Japanese consumer spending, could send the world's No.2 economy into recession.
Production in the electronics parts and devices industry -- one of Japan's leading industries -- fell 4.1 percent on month, the largest fall since October 2004
Some companies in the electronic devices industry reported that Chinese markets were dealing with an oversupply of some of their products, a senior government official said, a possible sign of falling U.S. demand.
Many Japanese companies exports machines parts to Chinese plants for processing and re-exporting to final consumer markets, including the United States.
Soaring energy and grain prices have also hurt Japan -- a heavy importer of commodities ranging from crude oil to wheat -- as consumers and small businesses are having difficulty coping with rising costs.
BOJ'S Outlook Getting Cautious
The Bank of Japan has been increasingly cautious in its outlook, although it has maintained the view that the economy will emerge from the current soft patch to resume moderate growth.
The bank's policy board members have also suggested recently that a rate cut will not be on the table in the near future.
The BOJ, without a full-time governor after parliament vetoed two government nominees for the job, will hold its next policy meeting on April 8-9. It will publish a twice-yearly economic outlook report at another meeting on April 30.
Investors are pricing in about a 50 percent chance of a rate cut by the end of the year, although many economists do not see much chance of any rate move in the near term.
The NTC Research/Nomura/JMMA Purchasing Managers Index, which gives an early snapshot of the health of manufacturing, declined in March -- its first fall in five months.