Japan’s industrial output declined in June, which is the third consecutive month showing a fall, indicating that the weakening global demand and the debt burden faced by the euro zone are affecting the country’s economy.

The data released Monday by Japan’s Ministry of Economy, Trade and Industry shows that the country’s industrial production dropped 0.1 percent in June from May. There was a 3.4 percent fall in May. This report coming ahead of the two day policy meeting in August 8-9 by the Bank of Japan has raised hoped that there will be announcement of monetary easing measures to boost the faltering economy.

Last week Japan's Statistics Bureau reported that consumer prices declined to 0.2 percent in June from the earlier year. Also the retail sales growth in Japan slowed down in June as compared to May, indicating that private consumption was being affected by the faltering global economic conditions.

Earlier last month, Japan reported that its gross domestic product (GDP) rose 1.2 percent in the first quarter as compared to the last quarter of the previous year. The eco-car subsidy helped drive consumer spending and public investment increased as earthquake-related reconstruction work got underway.

Meanwhile, the dependence on government support is worrying as a rise in tensions in the euro zone has hurt consumer and business confidence and is likely to weigh on private sector spending as the government support weakens. According to reports, the government program of the subsidies on auto sales could be terminated July or August.

There is an increase in construction projects due to the tsunami. However, apart from the boost from the reconstruction spending, which largely reflects the replacement of lost assets, economic fundamentals are also relatively weak.

Reconstruction spending should provide an ongoing boost to the economy, but the underlying demand is weak and is unlikely to be able to pick up any slack when the reconstruction stimulus fades further. Also major worrying factor is the strengthening of the yen, especially due to global factors. A weaker yen would help the Japanese exporters, but the Ministry of Finance is unlikely to succeed in delivering it while investors seek to escape the euro zone crisis.