TOKYO (AFP, BLOOMBERG) - Japan's factory output contracted a worse-than-expected 0.6 per cent on-month in July, official data showed on Monday (Aug 31), owing to lacklustre demand at home and as a slowdown in China weighs on exports.

The reading published by the industry ministry was weaker than the median forecast for a modest 0.1 per cent rise in a survey of economists by Bloomberg News.

In June, industrial production rose 1.1 per cent from May.

Production cutbacks in the electrical components and transport equipment industries led the decline in manufacturing, according to the government, as firms tried to cut down on an inventory buildup.

"Production is sluggish because private consumption and exports remain weak," Toru Suehiro, an economist at Mizuho Securities, told Bloomberg News.

"Concern about China and emerging economies is posing a risk to output."

Japan's overseas shipments have slowed, raising concerns about the fragile recovery in the world's number three economy as demand falls in neighbouring giant China.

China-bound shipments were off 1.3 per cent in July from 12 months earlier in volume terms, outstripping a 0.4 per cent fall to the rest of Asia.

Despite a recovery in the US economy, a slowdown in China - Asia's top economy and a major market for Japanese exporters - has raised a red flag.

Japan's economy contracted in the three months to June, boosting speculation the central bank will be forced to unleash more stimulus as Tokyo's "Abenomics" growth blitz stumbles.

Bank of Japan governor Haruhiko Kuroda said in New York last week that weakness in production and exports would pass and that leading indicators point to a pick up in business investment.

But "the drop in industrial production in July suggests that economic activity will recover only slowly this quarter", Marcel Thieliant of Capital Economics said in a commentary.

Also Monday, a survey released with the production data showed that manufacturers expected output in September would fall 1.7 per cent after growth of 2.8 percent in August.

However, Mr Thieliant noted that firms tend to be "too optimistic" about future production.

The factory output data came after separate figures on Friday showed core inflation, excluding volatile fresh food prices, was flat year-on-year, as lower fuel and other energy costs weighed on Tokyo's battle to push up prices.

Household spending also fell 0.2 per cent in July after declining 2.0 percent in the previous month, the ministry said.

The two monthly drops followed a strong rise of 4.8 per cent in May that offered some hope for spending after consumers snapped their wallets shut in the wake of a sales tax hike last year.

The consumption levy rise - Japan's first in 17 years - was aimed at taming a huge national debt but it slammed the brakes on consumer spending and pushed the economy into a brief recession.