TOKYO (AP) -- Growth in Japan's factory output stumbled in October, falling short of expectations and adding another kink in the country's fragile recovery.
Industrial production -- a key barometer of Japan's economic health -- edged up 0.5 percent from September, the government said Monday. Output rose 2.1 percent in September from August.
The result missed a 2.5 percent increase forecast in a Kyodo News agency survey of economists, as well as the government's estimate for a 3.1 percent gain.
The government said factory production "continues to show an upward movement." But the underwhelming figure suggests that the world's second biggest economy may be losing steam as stimulus spending tapers off. Add to that fresh worries about deflation and a strong yen -- a dangerous duo that threatens to derail growth.
On Friday the government said that October's core consumer prices index fell at a near-record pace of 2.2 percent from a year earlier. Prices have now fallen for eight straight months, and the government recently issued its first warning about deflation since 2006.
The news coincided with a sharp appreciation of the yen, which hit a 14-year high against the dollar on Friday. The greenback has recovered since then to the mid-86 yen level.
Junko Nishioka, chief economist at RBS Securities Japan, describes the latest output figure as a "bad start" to the quarter that could drag overall business activity.
Lackluster momentum in the auto and high-tech sectors offset strength among general machinery makers.
"We believe Japanese industrial production is in the process of topping out," said Glen Maguire, chief Asia economist for Societe Generale, in a note to clients. "The extent to which production commences a renewed upswing in 2010 will largely be dependent on the continuation of China's stimulus."
It may also depend on what, if anything, Japanese officials decide to about the yen, deflation and persistently weak consumer demand at home.
Japan's economy expanded at an annualized pace of 4.8 percent in the third quarter, the strongest growth in more than two years, thanks to stimulus measures and some improvement in global demand.
Members of Prime Minister Yukio Hatoyama's Cabinet signaled Monday that a second extra budget in the works will be bigger than expected in an effort to bolster the economy. Naoto Kan, Hatoyama's deputy, said the supplemental budget could top 2.7 trillion yen ($31 billion), according to Kyodo.
The central bank, which has been criticized as too complacent by government officials, appears to be shifting its rhetoric.
In a speech Monday, Bank of Japan Gov. Masaaki Shirakawa acknowledged Japan is in deflation and said he is carefully monitoring foreign exchange levels. The central bank is ready to take steps as needed to maintain financial market stability, he said, according to Kyodo.
At least for the rest of the year, the government predicts factory output will keep climbing. Production will rise 3.3 percent in November and 1 percent in December, according to the Ministry of Economy, Trade and Industry.
Shipments in October rose 1.3 percent, while inventories fell 1.5 percent.