Japanese industrial production, one of the nation's most closely watched economic figures, fell 1.0 percent in May from the previous month, the first decline in three months, the Ministry of Economy, Trade and Industry said Thursday.

Despite the drop in the seasonally adjusted figure, the production outlook for June and July was brighter with increases of 2.7 percent and 1.1 percent expected, suggesting that Japan's budding recovery will continue.

The fall, driven partly by sluggish production of midsize and small passenger cars, was much larger than expected by economists surveyed by Dow Jones Newswires, who estimated on average a drop of 0.1 percent.

The drop also was attributed to declines in electronics and machinery output.

Analysts said that overall recent data suggest that domestic demand in the world's second largest economy remains firm.

"I think that you should see the domestic recovery increasingly driving industrial production over the next six to 12 months, at the same time that export growth probably slows down," said Richard Jerram, economist at Macquarie Securities.

The ministry said industrial output fell in May partly on weaker auto exports to parts of Asia and the Middle East, but production of capital equipment and autos is expected to rise in June, while output of electronic parts and devices is likely to be strong in July.

"We can look for a moderate rise in production for the fourth straight quarter" in the July-September period, said Morgan Stanley economist Takehiro Sato in a report.

The ministry kept the assessment of industrial output unchanged from last month, saying it was in a gradual upward trend.

In May, shipments dropped 1.0 percent on month, while inventories fell 1.4 percent, the ministry said.

In April industrial production in Japan was up 1.4 percent from the previous month.

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