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 percent after growth of 2.8 percent in August.
However, 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 percent 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 percent 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.