Japan's factory output growth provides some relief for fragile economy

Japanese factories saw output rise for the second straight month in March as strong global demand for high-tech chips helped to ease some doubts that are weighing on the country's economic outlook.

After struggling to stage a convincing recovery from the coronavirus pandemic, the world's third-biggest economy is facing pressure from Russia's war in Ukraine, high energy and commodity prices and strict Chinese lockdown measures that are hurting demand.

Factory output expanded 0.3% in March from the previous month, official data showed on Thursday, as growing production of items such as those of semiconductors offset a drop in motor vehicle output.

That meant output growth slowed from February, when it grew sharply by 2.0%. The increase was weaker than a 0.5% gain forecast in a Reuters poll of economists.

Separate data showed retail sales were stronger than expected after the government lifted pandemic curbs, rising 0.9% in March from a year earlier, which was bigger than the median market forecast for a 0.4% rise.

"Personal consumption will likely pick up ahead, but supply constraints are going to affect output," said Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute.

"Output and especially that of motor vehicles will likely be impacted by the prolonged impact of the semiconductor shortage as well as the lockdown in Shanghai."

The fragile nature of Japan's recovery has prompted the nation's central bank to remain resolute in its ultra-easy stance, moving against the tide of tighter policy embarked on by many major economies.

At a two-day policy meeting concluding later on Thursday, the Bank of Japan is widely expected to maintain ultra-low interest rates and warn of heightening risks to the economy from soaring raw material costs.

Manufacturers surveyed by the Ministry of Economy, Trade and Industry (METI) expected output to advance 5.8 per cent in April, followed by a 0.8 per cent decline in May.

Japan's manufacturing sector has so far remained resilient in the face of uncertainty posed by the Ukraine situation that has led to a surge in commodity prices. A rapid weakening of the yen has also saddled exporters with higher input costs.

But private consumption, which accounts for more than half of gross domestic product, has yet to fully shake off the drag from the pandemic, after a record Omicron surge delayed its recovery.