Japan's factory output fell in September for the first time in four months as manufacturers took a hit from rising costs for raw materials and the global economic slowdown. The figure is likely to fall again next month before picking up in November, the government said.

In a brighter sign for the world's third-largest economy, retail sales grew for a seventh straight month, raising hopes for a sustainable boost in consumption after the easing of COVD-19-related border controls for foreign tourists earlier in October.

"While private consumption will continue its recovery from an easing COVID-19 situation and economic reopening, production may stall as worsening overseas economies hit Japanese exports," said Masato Koike, senior economist at Dai-ichi Life Research Institute.

Factory output fell a seasonally adjusted 1.6% in September from a month earlier, government data showed on Monday, larger than economists' median forecast for a 1.0% decline. That marked the first month-on-month fall in four months in industrial production and followed a 2.7% rise in August.

A 12.4% decline in auto sector production, its biggest fall in eight months, drove down the overall index.

Automakers and suppliers have struggled with a shortage of semiconductors, exacerbated by COVID-19 lockdown measures in China, where many Japanese firms have factories or suppliers. It was reported last week that Toyota has told suppliers to lower production targets for 2022.

"While auto production posted a large fall, a surge in the electronics sector's inventory ratio was also conspicuous, indicating a semiconductor demand slowdown," said Shintaro Inagaki, senior market economist at Mizuho Securities.

But automakers are disproportionately affected by the chip supply crunch, making their production outlook uncertain, Inagaki said.

Manufacturers surveyed by the Ministry of Economy, Trade and Industry (METI) expected output to fall another 0.4% in October and rise 0.8% in November.

Coronavirus-induced supply bottlenecks are easing, but demand-side risks from the global economic slowdown could further drag on output, a METI official said during a news briefing, adding that manufacturers' confidence in the business environment remains weak.

A Reuters corporate survey also showed souring sentiment earlier this month, with inflation among major concerns for businesses.

While Japan's annual consumer inflation rate was at 3.0% in September, the prices firms charge each other rose 9.7% in the same month.

Inflationary pressures in import-reliant Japan have been exacerbated by a prolonged slide in the yen, which hit a fresh 32-year-low against the dollar this month.

"We haven't heard much from manufacturers that the weak yen is positive per se for their production," the METI official said, based on the ministry's factory output survey. "Rather, with rising procurement costs on the weak yen, coupled with (higher) energy prices, some firms have voiced concerns for their business conditions."

On Friday, the government announced a ¥39 trillion ($264 billion) package as an inflation countermeasure funded by an extra budget of ¥29.6 trillion, while the Bank of Japan decided to keep its ultraloose monetary easing unchanged to support the fragile economy, even with the risk of fueling the yen's further weakness.

Separate data showed retail sales rose 4.5% year-on-year in September, extending a rebound since March when the government ended domestic COVID-19 containment measures. Analysts had expected a 4.1% growth.

On a seasonally adjusted month-on-month basis, retail sales grew 1.1% in September, rising for a third month.

A further bounce is expected in the coming months after Japan eased border controls on Oct. 11 for foreign tourists.

"But we may not see a full return to pre-pandemic levels" soon, since Chinese tourists still face strict border controls back home, said Dai-ichi's Koike.

Economists polled by Reuters last week expected the Japanese economy to expand an annualized 2.0% in the October-December period, slightly better than their previous estimate.