Japan was clobbered with a one-two punch Friday morning as weak data and a lacklustre business confidence report underscored the slowdown dragging on the world's number three economy.

The poor readings will heap pressure on policymakers to unveil more stimulus, after the yen surged again in the wake of Britain's shock vote last week to quit the European Union, threatening Japan Inc's profits.

Friday's data come ahead of parliamentary elections next week seen as a referendum on Prime Minister Shinzo Abe's faltering plan to kickstart the economy, dubbed Abenomics.

Spending by households across the country fell in May while inflation dropped for a third straight month, official data showed Friday, in a fresh blow to Abe's war on deflation.

They were the latest in a string of figures - including an earlier drop in factory output -- to raise concerns about Japan's prospects.

While the labour market remained tight in May, there are growing concerns about second-quarter economic growth. Japan dodged a recession in the first three months of the year.

"Today's numbers underscored the weakness in consumer spending, which is likely to keep putting pressure on the Japanese economy," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

Also Friday, the Bank of Japan's closely watched Tankan survey showed confidence among small firms and non-manufacturers worsened during the second quarter of the year.

Sentiment among major manufacturers remained stuck at its lowest levels since Abe kicked off his much-vaunted programme to boost growth more than three years ago.

The survey of over 10,000 companies is the most comprehensive indicator of how Japan Inc is faring.

- 'Brexit Blues' - 

Investors tend to buy the yen as a safe asset in times of turmoil, but a stronger currency hits Japan's exporters especially hard as it shrinks the value of the profits they earn overseas when converted back to yen.

Friday's weak Tankan report does not include the full impact of the so-called Brexit.

"It is important to remember that the (Tankan) survey was conducted throughout June and therefore reflects the UK's vote to leave the EU only in part," said Marcel Thieliant at research house Capital Economics.

Friday's disappointing reports will put a renewed focus on the central bank's meeting later this month, as markets try to gauge whether policymakers will unleash more stimulus to prop up Japan's economy.

The Bank of Japan's massive 80 trillion yen monetary easing plan is a cornerstone of efforts to bring an end to years of the deflation that held back growth in the once-powerhouse economy.

Falling prices may sound like a good thing for consumers but they tend to delay spending, which in turn hits firms' hiring and expansion plans, which is bad for the economy.

Tokyo has struggled to jack up prices, with Abenomics finding itself under a renewed spotlight more than three years on.

The plan -- a mix of massive monetary easing, government spending and red-tape slashing -- brought the yen down from record highs and made Japan's exports more competitive but that has not been enough to deliver consistent growth.

The International Monetary Fund recently said the plan needed to be "reloaded" with steps to boost wages and bring about labour reforms.

Japan's parliamentary elections are widely seen as a vote on Abe's plan, although his premiership will not likely be contested. Half of the 242 seats in Japan's upper house are up for grabs in the July 10 vote.

Source: AFP