Japan last week announced that its factory output fell at the fastest pace in five years in March amid falling US bound exports. Japanese factory output fell by a bigger than expected 3.1% in March from the previous month, more than reversing a rise of 1.6% in February, the Ministry of Economy, Trade and Industry said.

It was the biggest fall since January 2003 and much worse than the 0.7% decline expected by markets, providing a clear indication that the world’s second-largest economy is losing steam.

Mr Hiroshi Shiraishi of Lehman Brothers said “Industrial production may contract again in the second quarter but we are not expecting a sustained or sharp downturn.”

He added that “If the global economy escapes a severe downturn then Japan should avoid a severe recession, because it is in much better shape than it was during past period of economic difficulties.”

Japan’s corporate sector has been a key driver of the recovery in Japan after a decade long slump as strong export growth gave companies the cash to invest heavily in new production facilities. But with exports to the shaky US economy now declining and a stronger yen hitting export revenues, executives are becoming more cautious about the earnings outlook.