"As movements towards an incipient recovery are weakening, the state of the economy remains roughly flat," the government Cabinet Office said in its monthly report on the economy.

The environment, such as concerns over the future of the US and other economies, and sluggish domestic stock prices, continues to be severe Japanese Government

"Exports are declining somewhat and industrial production has become flat."

Industrial output in October, the latest month for which data is availble, fell 0.2% from September owing to slowing demand at home and overseas.

Last month's assessment indictated that while the economy was showing signs of recovery, the pace was slowing.

The government last lowered its economic assessment for two consecutive months in May and June last year.

Little good news

However, the Cabinet Office upgraded its assessment of corporate profits and said earnings could improve further.

The Bank of Japan's quarterly "tankan" survey of business confidence last week reported companies expect profits to rise in the coming financial year.

But with few positive indicators, the government remained cautious on the economic outlook.

"The environment, such as concerns over the future of the US and other economies, and sluggish domestic stock prices, continues to be severe, and there are concerns over downward pressure on final demand," it said.

The report was also downbeat on the labour market, after unemployment hit a record 5.5% last month.