Factory output contracted in February, data showed Monday, a surprise decline that highlighted the uneven economic recovery in the world's number three economy as consumers brace for a sales tax hike.
The 2.3% fall in output from January -- the first decline in three months -- is likely to aggravate concerns about the potential impact of the increased levy, which takes effect on Tuesday.
There are fears that the tax rise to 8% from 5% -- seen as crucial to paying down Japan's huge national debt -- will weigh on consumer spending and derail a budding recovery.
The last time Japan brought in a higher levy in 1997, it was followed by years of deflation and tepid economic growth.
Prime Minister Shinzo Abe faces a tricky balancing act as he tries to nudge the economy out of a cycle of falling prices and lackluster growth with a growth blitz dubbed Abenomics.
Falling production of large passenger cars and auto parts led the decline in February's factory output, underscoring how exports and domestic spending remain wobbly.
A producers' survey released with the government data show manufacturers expect a rise in March industrial production followed by a decline in April as the effects of the tax hike become clearer.
"Industrial production continues to show an upward movement," said the economy, trade and industry ministry.
However, the weaker-than-expected data will mean a renewed focus on the Bank of Japan's widely watched Tankan quarterly business confidence survey, set to be released Tuesday.
Tax Rise Worries
Adding to concerns over the economy, the Markit/JMMA purchasing managers index, published Monday, fell in March from a month earlier, to 53.9 from 55.5. A reading of 50 or above indicates growth.
"Output continued to expand (in March), which companies attributed to a hike in demand before the increase in the sales tax," Markit said.
"However, the expansion in output was slower than February and the weakest seen in six months. Panelists partly blamed the weakening of the expansion of output on factories being damaged by heavy snow."
Poor winter weather hammered parts of Japan, as a deep freeze in North America was also blamed for weaker activity in the United States.
Last week, more upbeat figures showed Tokyo's bid to stoke lasting inflation in a country plagued by years of falling prices was gathering steam, while unemployment fell to a more than six-year low.
But the stronger inflation reading was largely driven by rising post-Fukushima energy import costs, rather than prices going up on the back of strong, across-the-board consumer demand.
A key worry is that Japan's last tax rise foreshadowed a cycle of falling prices although other factors, including the Asian financial crisis, were also blamed.
"It will be interesting to see whether output in the manufacturing industry will continue to grow as fast after the increase in the sales tax is implemented," said Amy Brownbill, a Markit economist.
Last time "the overall fall in demand contributed to a prolonged downturn, and there will be concern of something similar happening again."
