Japan\'s factory output unexpectedly fell in July, data showed on Friday, offering the latest evidence that turmoil overseas is damaging a recovery for the world\'s third-largest economy. Growing fears about the fiscal situation in Europe -- a major market for Japanese products -- and the strong yen are hurting demand for products from the nation\'s factories, analysts say. The 1.2 percent decline in July from a month earlier was significantly worse than a market forecast of 1.8 percent growth. \"Industrial production appears to be flat,\" the industry ministry said in a statement. A decline in output of parts used in electronics such as mobile phones and falling domestic demand for flat-panel televisions stoked the monthly decline, with the gloomy data helping push the benchmark Nikkei 225 stock index down 0.98 percent after markets opened. \"It was originally assumed that the weakness in April-May would be temporary and followed by a rebound in summer. But such a scenario clearly fell through,\" said Tatsushi Shikano, senior economist at Mitsubishi UFJ Morgan Stanley Securities. Amid the turmoil in Europe and an uncertain recovery in the United States, there are also growing fears about slowing demand in Asia. Exports to China, Japan\'s largest trading partner, fell nearly 12 percent while shipments to other economies in Asia -- South Korea, Hong Kong, Taiwan and Singapore -- also fell a sharp 14.2 percent. \"This could indicate that the trade balance won\'t be recovering for the time being,\" Daisuke Karakama, market economist and vice president of forex sales at Mizuho Corporate Bank, told Dow Jones Newswires. Japan\'s economic picture showed a worrying trend when earlier data revealed a much worse-than-expected trade deficit in July of 517.4 billion yen ($6.5 billion). A survey of manufacturers released Friday with the factory output data showed that companies expect production to inch up just 0.1 percent in August before tumbling 3.3 percent in September. Separately, consumer prices were down 0.3 percent on-year in July, the third consecutive month of falling prices, the internal affairs ministry said. Japan has been in deflation for years, with a series of monetary and fiscal policy moves failing to reverse the trend. The unemployment rate was flat at 4.3 percent last month. Japanese industry is facing major challenges after the country shut down its nuclear reactors in the wake of last year\'s atomic crisis, with industrial users being asked to make deep cuts in energy consumption. All 50 of Japan\'s nuclear power stations were switched off after the March 11 tsunami, which swamped reactors at the Fukushima Daiichi plant and sent them into meltdown. 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 by making Japanese products pricier overseas. Europe, a key market for everything from Japanese televisions and DVD players to cars and machinery, has been at the top of policymakers\' concerns, with officials repeatedly saying the eurozone crisis was the biggest threat to the nation\'s economic recovery.