Japan's factory output tumbled 3.1% in May, official data showed today, a bigger-than-expected drop as a slump overseas hurt exports.

But other figures pointed to a healthier picture at home.

The output decline comes amid growing fears about the situation in Europe - a major market for Japanese products - and a strong yen hurting Japan, the world's third-largest economy.

Economists had expected a 2.8% fall in industrial production in May.

"The lower output was mainly attributed to such industries as transport, chemicals and general machinery," the economy, trade and industry ministry said in a statement. "The production of passenger vehicles, trucks and small-sized cars especially fell," it added.

A survey of manufacturers released with the data showed that companies expect output to reverse course and rise 2.7% in June and 2.4% in July.

Other data released today showed household spending jumping 4% year-on-year in May, well above expectations of a 2.3% rise, while unemployment slipped. Japan's jobless rate fell to 4.4% in May, edging down from 4.6% the previous month, the internal affairs ministry said.

Consumer prices fell in May with annual inflation standing at -0.1%, the first price decrease since January, largely due to lower prices for electronic products, the data showed. Japan has been in a deflationary spiral for years, with a series of monetary and fiscal policy moves failing to reverse the trend.

The data came after figures yesterday showed that retail sales were also better than expected, with government vehicle subsidies a key but temporary driver.

The Japanese industrial sector is facing major challenges after the country shut down its nuclear reactors in the wake of last year's atomic crisis, with industry being asked to make deep cuts in energy use. All 50 of Japan's nuclear power stations have been switched off after the March 11 tsunami, which swamped reactors at the Fukushima Daiichi plant and sent them into meltdown.

The government has approved a plan to restart two reactors amid widespread anti-nuclear sentiment.

Despite the dip in unemployment in May, some of the country's major electronics giants including Sony and Panasonic have announced thousands of job cuts in the wake of record losses as they struggle to compete with overseas rivals.

Manufacturers were hammered by last year's natural disasters, while the strong yen - which hit record highs against the dollar last year - has hurt exports. Europe, a key market for everything from Japanese televisions and DVD players to cars and machinery, remains at the top of policymakers' concerns, with officials repeatedly saying the euro zone crisis was the biggest threat to Japan's economic recovery.