Japan's industrial output rose at the fastest pace in 18 months in December but below the analysts’ expectations, while the manufacturing PMI contracted in January, but at a slower pace in four months, strengthening hopes of economic recovery after several-month long economic slump led by weakness in exports.

Analysts believe stabilization in overseas economies and improvement in export orders is likely to strengthen the manufacturing activity in the coming months.   

Japan’s factory output rose at lower-than-expected rate of 2.5 percent in December, after a 1.4 percent decline in November, data from the Ministry of Economy, Trade and Industry showed Thursday. The analysts polled by Reuters had forecast the factory output to grow at 4.5 percent.

Analysts pointed out that the data indicates the bottoming out of the economy, while the trade ministry official attributed the positive trend to recent fiscal policy measures taken by the Japanese government.

"The results are not that bad and the forecasts show that production could continue to grow at a good pace," Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities told Reuters.

"We can say that production is bottoming out. Overseas economies are not likely to deteriorate any further, so this will support Japanese production and the overall economy," he said.

Backed by the Japan Central Bank’s open-ended monetary easing policy, Prime Minister Shinzo Abe's government adopted big fiscal spending to bolster the economic activity. This apart, depreciation of Japanese yen against the dollar seems to have strengthened the export competitiveness of the country.

"Positive effects from a weak yen and the government's economic measure are expected to appear," a trade ministry official averred.

Japan's Manufacturing PMI Contracts At A Slower Pace In January

In a separate report published by the Markit/ JMMA Thursday, Japan's Manufacturing Purchasing Managers’ Index (PMI) posted a contraction in January but at a slower pace in four months, as the operating conditions deteriorated and new orders and output fell on weak overseas demand.    

According to the data, the headline PMI climbed to a seasonally adjusted 47.7 in January from 45.0 in December, which was the lowest growth rate in more than three years.

Any index number below 50 indicates an economic contraction. The continued shrinking of the country's manufacturing activity is seen increasing the likelihood of a sharp contraction in the economy.

The data showed that despite an improvement in the manufacturing activity in December, the business climate remained challenging with output, new orders and employment registering contractions. The operating costs increased for the first time since April 2012, largely due to the depreciation of Japanese Yen.

Data showed “a lack of market demand, both at home and abroad in January. New order volumes again fell at a sharp rate, with order books deteriorating across all three market groups covered by the survey,” Markit said.

Orders from foreign markets slumped for the 10^th consecutive month, while the manufacturers continued clearing the backlogs of work.

“Operating conditions for Japan’s manufacturing sector remained challenging at the start of 2013, with a number of key barometers measuring the sector’s health stuck in contraction territory. Although rates of decline generally slowed, the latest data remain consistent with another fall in output on official measures,” said Paul Smith, Senior Economist at Markit, in a note.

The depreciation of yen has resulted in an increase in input prices for the manufacturers in January. However, the analysts are hoping weakness in the currency will boost the exports.

“Of course, in time the hope is that a weaker currency will instead provide a boost in export competitiveness to leave Japan better placed to benefit from the nascent upturn in global manufacturing performance,” Smith added.

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