(Bloomberg) -- Japanese factories increased output in January for the first time in three months, signaling the country’s economic recovery is continuing despite a renewed state of emergency to contain the coronavirus.Industrial output rose 4.2% from the previous month, with production of memory chips and semiconductor equipment climbing, the trade ministry reported Friday. Economists had projected a 3.8% overall gain amid rising exports, especially to China.Separate figures showed retail sales fell at less than half the predicted pace in January compared with the prior month. Declines eased in Tokyo consumer prices, a bellwether for national inflation.While the spending drop was far smaller than during a wider-ranging emergency last year, it still underscored a split in the recovery between domestic and export-driven sectors. Since consumer spending accounts for more than half of the economy, a sustained rebound after the emergency requires people to open their purse strings.Key Insights“How much consumption will come back starting in March will hold the key,” said economist Atsushi Takeda at Itochu Research Institute. “I don’t think consumption will be back at full speed as the government is likely to maintain some restrictions with the Olympics nearing.”Japan’s decision to focus its latest emergency advisory on bars and restaurants in major cities is exacting a smaller toll than last spring’s more wide-scale approach. While the economy is seen falling back into contraction this quarter, rising output is likely to offer support to the recovery once the emergency ends.Prime Minister Yoshihide Suga will decide as early as today whether to lift the emergency outside the Tokyo region about a week ahead of schedule, a move likely to help spending and sentiment at least marginally. The number of new virus cases in Japan has fallen to a fraction of the peak and last week the country started giving vaccines.High frequency data compiled by Bloomberg Economics shows activity rising in Japan more than in place likes the U.S., the U.K. or Canada.On the manufacturing side, Japan’s production has been helped by a pickup in demand from China, where exports rose last month by the most since 2010. An ongoing global shortage of semiconductors is driving output in electronics but also weighing on the auto industry, a key sector for Japan.What Bloomberg Economics Says...“A smaller-than-expected decline in Tokyo’s core inflation gauge was driven by volatile factors. As such, we don’t expect the reading to have a meaningful implication to the Bank of Japan’s policy review in March.”--Yuki Masujima, economistFor the full report, click here.Get MoreTokyo’s consumer prices excluding fresh food, a leading indicator of nationwide inflation trends, fell at a slightly slower pace of 0.3% in February from a year earlier, according to a separate report from the ministry of internal affairs.Retail sales decreased 2.4% in January compared with a year earlier, better than the 2.6% projected fall by economists.Industrial production is expected to rise 2.1% in February and fall 6.1% in March, according to a ministry survey.(Adds economist’s comments.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.