Japan factory output up, but soft outlook and cooling retail sales pressure economy

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Japan Feb factory output +2.5% vs f'cast +2.3%

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Minimal factory output growth seen in March, April

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U.S. tariffs rattle Japanese manufacturers, including autos

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Japan Feb retail sales slows, add to pressure on economy

(Adds government official, economist comments in paragraph 4, 7-8, 14)

By Satoshi Sugiyama

TOKYO, March 31 (Reuters) - Japan's factory output rose at a better than expected pace last month, but cooling retail sales growth and a slowdown in production expected by manufacturers in the near term pointed to the growing strains for an economy facing rising external risks.

Japanese companies are increasingly worried President Donald Trump's protectionist policies would trigger a broader global downturn, with automakers at home bracing for the effects of U.S. tariffs.

Industrial production rose 2.5% in February from the previous month when it declined 1.1%, and was just ahead of a median market forecast for a 2.3% rise, the Ministry of Economy, Trade and Industry (METI) data showed on Monday.

"At the moment, we have not heard of any direct impact on production from proposed tariffs, but we'll need to keep an even closer eye on the situation from next month onwards," a METI official said.

The output of production machinery, including chipmaking equipment, increased 8.2% from the previous month, while the production of electronic parts and devices increased 10.1%, according to the METI.

However, the near term outlook highlight a bumpy road for manufacturers who expect seasonally adjusted output to increase 0.6% in March and edge up 0.1% in April, a METI survey showed.

The softness in overseas demand, partly led by a rapid deterioration in consumer sentiment in the U.S. as well as a muted economic recovery in China and Europe, will weigh on Japanese production, said Shungo Akimoto, market economist at Mizuho Securities.

"It's difficult to expect a significant increase in production in the near future, and the pace of future increases (in output) will remain moderate," Akimoto said.

Separate data showed Japanese retail sales rose 1.4% in February from a year earlier, less than a median market forecast for a 2.0% rise. They rose 4.4% last month.

The relatively subdued domestic consumption points to a difficult year ahead for the world's fourth-largest economy, especially as Trump's blitz of tariffs against trading partner countries drag on business investment and confidence.

Trump's announcement of a 25% additional tariff on auto imports, expected to come into force later this week, is particularly worrisome for policymakers in Japan given its reliance on auto exports to the U.S.

Automobiles made up 28.3% of Japan's total exports to the United States in 2024, the biggest ratio among all items, according to Ministry of Finance data.

Production of motor vehicles rose 0.2% in February from the previous month, according to the METI.

The METI official also said the government will closely monitor any impact on motor vehicle production from an accident at Toyota Motor supplier Chuo Spring in early March. (Reporting by Satoshi Sugiyama; Editing by Kim Coghill and Shri Navaratnam.)