Japan's factory output tumbled 3.1 percent in May, official data showed Friday, 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 fiscal situation in Europe -- a major market for Japanese products -- and a strong yen hurting Japan, the world's third-largest economy.

A survey of economists polled by Dow Jones Newswires showed expectations for a 2.8 percent 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 percent in June and 2.4 percent in July.

Other data released Friday showed household spending jumping 4.0 percent year-on-year in May, well above expectations of a 2.3 percent rise, while unemployment slipped.

Japan's jobless rate fell to 4.4 percent in May, edging down from 4.6 percent the previous month, the internal affairs ministry said.

Consumer prices, meanwhile, fell in May with annual inflation standing at minus 0.1 percent, 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.

Friday's data came after figures on Thursday showed that retail sales were also better than expected, with government vehicle subsidies a key but temporary driver.

"Spending figures are flattered by the auto subsidy which is driving sales of new vehicles and is expected to expire later this summer," Capital Economics said in a note ahead of the release of Friday's statistics.

Taro Saito, senior economist at NLI Research Institute in Tokyo, said the data paint a mixed picture for Japan.

"The (output) readings for June and July will likely be lower than manufacturers' forecasts because the global environment for exporters has not improved much," he told AFP.

"But I also have to point out that domestic demand has proven to be pretty strong and supporting the Japanese economy. We don't need to be so pessimistic."

Japanese industry 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 eurozone crisis was the biggest threat to Japan's economic recovery.