Japan's Prime Minister Shinzo Abe Yoshikazu Tsuno | Pool | Reuters

Japan's government lowered its assessment of the economy on Wednesday as output sags, in a worrying sign that recovery is stalling as overseas demand weakens. The government also downgraded its view of industrial production as factory activity contracts and inventories rise. The gloomy overall assessment raises the stakes for the Bank of Japan's monetary policy meeting at the end of the month and places Prime Minister Shinzo Abe's economic policies under even greater scrutiny. "The economy is in a gradual recovery trend, but there are some pockets of weakness," the Cabinet Office said in its monthly economic report. "Recently, industrial output has weakened."

Last month, the government said the economy was recovering but in some parts the recovery has dwindled. The last time the Cabinet Office downgraded its assessment was in October last year. An unexpected fall in August industrial production prompted some economists to suggest Japan's economy could contract in July-September, which would put it in a technical recession after the previous quarter's contraction. In addition to the decline in output, a rise in inventories also led the government to lower its assessment. The Cabinet Office said exports are weakening, the same as its assessment from last month.