Japan's factory output fell more than expected in July, signalling a rocky start to the second half of the year for manufacturers as worries mount over growth in China and the global economy. Industrial output fell 2.0 per cent in July from the previous month, data from the Ministry of Economy, Trade and Industry (METI) showed on Thursday. The reading was worse than a median market forecast for a 1.4 per cent drop and followed 2.4 per cent growth in June.

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"In July, output in many industries, including the machinery for production industry, declined due to a decrease in domestic and overseas orders," a METI official said, adding the government agency cut its assessment on industrial output to "seesawing" from "moderate recovery trend." Output of electronic parts and devices fell 5.1 per cent, while that of production machinery decreased 4.8 per cent, driving the overall decline.

The soft factory output figures followed anaemic July trade data, which saw Japan's exports contract for the first time in more than two years due to faltering global demand for light oil and chip-making equipment.

Among production machinery, output for semiconductor manufacturing equipment fell by 16.4 per cent. While the output level itself was not bad, the outlook could be severe taking demand for semiconductor memory into consideration, the METI official said.

Production of cars, on the other hand, rose 0.6 per cent thanks to easing supply chain constraints for automakers. Carmakers like Toyota and Honda have huge influence over other Japanese manufacturers through their vast supplier networks.

Manufacturers surveyed by the industry ministry expect their output to rise 2.6 per cent in August and increase 2.4 per cent in September, Thursday's data also showed, although the forecasts typically tend to be more optimistic than actual outcomes.

Production is expected to remain weak, with the possibility of further downward pressure from Toyota's system failures that halted production at 14 domestic assembly plants on Tuesday, said Masato Koike, economist at Sompo Institute Plus.

Property concerns in China are partially affecting the market for building materials such as steel and plastics in Japan, the METI official said.

"We will continue to monitor the impact of the global economic downturn and price hikes," he said.

Other data showed Japanese retail sales expanded 6.8 per cent in July from a year earlier. It was higher than a median market forecast for a 5.4 per cent gain and marked the 17th consecutive month of expansion since March 2022, backed by Japan's economy and tourism reopening from the COVID-19 pandemic.

Compared with the previous month, retail sales grew 2.1 per cent in July, following a 0.6 per cent decline in June, the data showed.

Japan's economy, the world's third-largest, is expected to contract an annualised 1.2 per cent in July-September, according to the latest Reuters poll, after rosy 6.0 per cent growth in April-June.