Fears that the Japanese economy is heading back into recession have increased following the release of a dismal set of economic figures.

This clearly illustrates that the domestic economy is falling into a deep deflationary phase

Shinichi Sato, Mitsubishi Securities

Japan's jobless rate increased last month to 5.5%, up from September's 5.4% and matching the post-World War II high seen in December last year.

Industrial output fell by 0.3% in October, the second month in a row that the measure has fallen.

And household spending fell by 0.7% compared with October last year.

Deflation kept its hold over the economy, with retail prices falling for the 37th month in row.

"This clearly illustrates that the domestic economy is falling into a deep deflationary phase," said Shinichi Sato, fixed income strategist at Mitsubishi Securities.

"(The industrial output) results were far worse than our expectation of plus 0.5% and also much lower than the original (government) forecast of plus 1.2%," he said.

Grim outlook

September's fall in industrial output had been the first drop for three months, and most analysts had expected output to recover in October.

But sluggish growth in the US - Japan's biggest export markets - has continued to hit hard.

While exports rose by 8.5% in October from the previous month, analysts said the jump was down to one-off factors.

The Ministry of Economy Trade and Industry (METI) lowered its outlook for industrial output saying it would remain flat.

METI said manufacturers' output would fall by 1% this month, but rise 0.6% in December.

The disappointing industrial output figures cast a shadow over the stock market, but the Nikkei recovered to close up 38.78 points, a rise of 0.42%, at 9,215.56.

Japan's Financial and Economics Minister Heizo Takenaka is due to announce a timetable for dealing with the banking sector's bad loans later on Friday.