By Daniel Leussink
TOKYO (Reuters) - Japan's factory output rose for the third straight month in August, in a positive sign for manufacturers as economic activity gradually recovered further from the impact of the coronavirus pandemic.
Demand among Japan's global trading partners, and especially China, has come off lows seen earlier this year when the virus crisis forced governments to impose lockdowns that hurt global trade and production.
Separate data showed retail sales posted their sixth straight month of declines in August as worries over a fragile economic recovery kept a lid on consumer spending.
Official data released on Wednesday showed factory output increased 1.7% in August from the previous month, boosted by rebounding production of automobiles and car parts as well as iron, steel and non-ferrous metals.
August's rise, which was much slower than the previous month's record 8.7% gain, came in largely in line with the median market forecast of 1.5% growth in a Reuters poll of economists.
But analysts said the recovery in car output was expected to fade in the coming months as a resurgence in coronavirus infections around the world would likely lead to weaker demand.
"It's unavoidable that the rebound in car production will become more gradual," said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute.
"It can't really be counted on as a catalyst for the recovery of Japan's economy."
Manufacturers expect output to rise 5.7% in September and 2.9% in October, the Ministry of Economy, Trade and Industry (METI) said.
Japan's small and medium manufacturers are expecting the pace of economic recovery to be quite slow, said Yushi Shinada, a researcher at the Shinkin Central Bank Research Institute.
"The time of recovery is not there yet," Shimada said, adding that many small producers depend on improved conditions at large manufacturers for their situation to get better.
Sentiment among small and medium enterprises remained deeply negative in September, a quarterly Shinkin Central Bank Research Institute survey on their business conditions showed on Thursday.
The headline index came in at minus 47, largely unchanged from the previous quarter's minus 48.3.
In a sign of Japan's struggle to shake off weak consumer demand, retail sales fell 1.9% in August from the previous year, declining for the sixth month, separate data showed on Wednesday.
The fall was not as sharp as a 3.5% drop seen by economists in a Reuters poll, and followed a 2.8% drop in July.
The world's third-largest economy posted its worst postwar contraction in the second quarter as the COVID-19 crisis paralysed business and consumer demand.
It had already slipped into contraction late last year as consumer sentiment slumped after the government last October raised the nationwide sales tax to repair its extremely heavy public debt burden.
(Reporting by Daniel Leussink; Editing by Stephen Coates)