The Ministry of Internal Affairs and Communications said the nationwide CPI fell 0.1 percent in September from the same month the previous year, a reading that suggests Japan has yet to escape from deflation.

A lack of inflationary pressure will likely cast doubt on the Bank of Japan's decision to raise rates in the coming months, even as the central bank deals with lingering concerns over a U.S. economic slowdown and the fallout from the subprime mortgage problems.

The core CPI for the Tokyo metropolitan area -- leading price indicator for rest of nation -- remained flat in September from a year earlier.

Both the nationwide and Tokyo readings were in line with market forecasts.

Meanwhile, industrial output fell 1.4 percent in September when compared with August, declining for the first time in two months, the Ministry of Economy, Trade and Industry said.

The fall matched forecasts by economists surveyed by Dow Jones Newswires and Nikkei.

The government attributed the drop largely to a slowdown following a big jump in the previous month. Industrial output rose 3.5 percent on month in August following a 0.4 percent fall in July, the ministry said.

The trade ministry also said that manufacturers surveyed expect output to rise 3.8 percent on month in October but decrease 0.7 percent in November.

The ministry kept unchanged its optimistic assessment that industrial output is increasingly gradually.