After struggling to stage a convincing recovery from the coronaviruses, 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.
In March, factory output increased 0.3 per cent from the previous month, according to official data on Thursday April 28 as growing production of items such as those of semiconductors offset a drop in motor vehicle output.
In February, output growth slowed, when it grew sharply by 2.0 per cent. The increase was lower than the 0.5 per cent gain predicted in a Reuters poll of economists.
Retail sales were stronger than expected after the government lifted the pandemic curbs, rising by 0.9 per cent in March from a year earlier, which was bigger than the median market forecast for a 0.4 per cent 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.
The prolonged impact of the semiconductor shortage as well as the lock down in Shanghai will likely affect the output and especially of motor vehicles. The fragile nature of Japan's recovery has prompted the central bank to take a cautious stance, moving against the tide of tighter policy embarked on by many major economies.
The Bank of Japan is expected to keep its low interest rates at a two-day policy meeting later on Thursday, and warn of the risks to the economy from soaring raw material costs.
In April, the Ministry of Economy, Trade and Industry's METI expected output to advance 5.8 per cent, following a 0.8 per cent decline in May.
Japan's manufacturing sector has remained resilient in the face of uncertainty posed by the Ukraine situation that has resulted in a surge in commodity prices. Exporters have been saddled with higher input costs because of a weakening of the yen.
Private consumption, which accounts for over half of gross domestic product, has yet to shake off the drag of the epidemic, after a record Omicron surge delayed its recovery.