Japan’s factory output rose less than expected in May, missing analysts’ estimates as U.S. tariffs hit the nation’s exports, clouding the outlook for the Asian economy as it faces the risk of a technical recession.

Industrial production increased 0.5% from the previous month, the industry ministry reported Monday. Economists had expected a 3.5% gain. Output fell 1.8% from a year earlier, missing expectations of a 1.6% rise.

Forecasts for the next few months also remained weak, with manufacturers anticipating monthly production to gain 0.3% in June and decline 0.7% in July, according to the release.

U.S. President Donald Trump’s tariff campaign continues to disrupt global commerce, with abrupt policy changes making it difficult for companies to plan and execute production.

"Industrial production is factoring in the impact of tariffs,” said Hideo Kumano, economist at Dai-Ichi Life Research Institute. "There are no signs of major shocks, but production forecasts indicate that there is a gradual downward pressure on production.”

Production machinery led the gain in output on a month-on-month basis. Autos, which face a 25% tariff on shipments to the U.S., rose 2.5%. Transportation vehicles excluding cars were the biggest drag, falling 16.3%, with airplane parts leading the decline. Output for steel and nonferrous metals rose 1.9% before Trump doubled the duty on steel and aluminum to 50% in early June.

It remains unclear if the baseline duty on Japanese exports to the U.S. will return to 24% from 10% in early July. More than two months into negotiations, Japan has yet to reach a trade agreement with the U.S. as Tokyo targets a complete package that covers sectoral tariffs including its all-important auto industry.

Trump characterized trade in cars between the U.S. and Japan as unfair on Sunday, saying that the U.S. can set its trade terms with Japan unilaterally.

"The trade negotiations between Japan and the U.S. are likely to drag on,” said Kumano. "Companies are responding by lowering prices to maintain production volume. That weighs on profits, which would weigh on bonuses in the medium to long term. That could in turn have a negative impact on consumption.”

Separate trade data for May showed earlier that some companies are cutting costs to keep up the volume of exports in order to stay competitive as U.S. tariffs hit. Car exports to the U.S. fell about 25% by value last month, while declining only 3.9% by volume. Monday’s output data, measured by indexes that track manufacturing volumes, don’t reflect how the tariffs are affecting production as calculated by value.

"The central bank’s focus could shift to mounting upside risks to inflation — already fueled by rising food and labor costs, and likely to be exacerbated by still-high oil prices following the Israel-Iran conflict,” Bloomberg economist Taro Kimura said.

The tariffs are clouding the economic outlook ahead of a July 20 Upper House election, and the Bank of Japan is watching the impact closely as it mulls the pace and extent of its policy normalization. The BOJ’s latest tankan survey, due Tuesday, is expected to show sentiment among large manufacturers has deteriorated.