Japan's industrial production fell far more than expected in March, pushing up Japanese bond prices and stoking worries that U.S. economic woes are hitting Japanese companies.
Household spending and forward-looking jobs data were also weak, setting a bleak environment for the central bank as it reviews rates on Wednesday and issues a half-yearly economic report in which analysts expect it to downgrade its growth outlook and increase its inflation forecast.
Industrial output fell 3.1 percent in March -- the biggest monthly fall for at least five years and far below a market median forecast of a 0.8 percent drop.
"This could raise concerns that the Japanese economy is slowing down sharply in the January-March quarter," said Yasuhide Takahashi, economist at Nomura Securities.
The Japanese weakness follows a slump in U.S. confidence to a five-year low and falling U.S. house prices, showing consumers have yet to buy into confidence among some investors that the worst is over in the global credit crunch.
The U.S. data sent Treasuries higher and that, along with the weak Japanese figures, boosted the price of Japanese government bond futures and interest rate futures, which have fallen sharply in the past week on worries about rising inflation.
"It seems like the pull-back in JGBs that took place on Monday and last Friday may be over," said Mari Iwashita, senior strategist for Daiwa Securities SMBC's fixed income research department.
The Bank of Japan, which holds a one-day policy meeting, is also expected to downgrade its view of the economic outlook in its half-yearly economic forecasts due at 3 p.m.
Manufacturers' output, the core component of production, is expected to fall 0.3 percent in April but rise 3.4 percent in May, data from the Ministry of Economy, Trade and Industry showed.
"Output is also not expected to recover much in coming months after a sharp drop in March. We think the economy will remain sluggish until the third quarter of this year," Takahashi said.
Seasonally adjusted unemployment dipped to 3.8 percent in March from 3.9 percent in February.
While that was better than the flat result in a consensus market forecast of 3.9 percent, economists focused on a fall in the ratio of job offers to job seekers.
That ratio fell to 0.95, meaning 95 jobs were available per 100 applicants, below a median forecast of 0.96 and continuing a fall from a peak of 1.07 last June. "The trend shows hiring is slowing for the moment especially among small businesses, while big corporations continue to recruit new employees briskly," said Yoshiki Shinke, senior economist at Dai-ichi Life Research.
Overall household spending fell 1.6 percent in March from a year earlier in price-adjusted real terms, countering a median market forecast for a 0.5 percent increase and further signalling weak consumer spending.
The Bank of Japan is expected to say the economy is slowing down for the time being in its economic outlook report.
Still, like other central banks, the BOJ faces rising fuel, raw materials and food prices as it ponders what to do with rates, already at a very low 0.5 percent.
Japan's core annual inflation rate hit a decade high of 1.2 percent in March.
With a credit crisis weighing on global economic growth, investors have until recently been looking for a BOJ rate cut, rather than an increase, especially because consumer prices in industrialised economies are climbing on higher commodity costs rather than strengthening demand.
But as the expectation is growing that the Federal Reserve's easing cycle is coming to an end after one more 0.25 percentage point cut expected on Wednesday, markets are now pricing in a BOJ rate hike.
Swap contracts on the overnight call rate are pricing in around a 60 percent chance of a rate hike by the end of year.
In more downbeat news for the Japanese economy, a private survey showed manufacturing activity in Japan slipped to a five-year low in April, hurt by a marked decline in new orders and a worsening business environment.
The NTC Research/Nomura/JMMA Purchasing Managers Index, which gives an early snapshot of the health of manufacturing, declined to a seasonally adjusted 48.6 in April from 49.5 in March and was the lowest since 48.1 in February 2003. A reading below 50 points to a contraction in manufacturing activity.