The bank said a further weakening of corporate activity, including production and investment, has increased uncertainty over the global outlook.
"Business fixed investment is decreasing, while exporting conditions continue to deteriorate," it said. In the July report, the BoJ had said that business fixed investment had started to fall. The BoJ noted that net exports are now falling due "not only to a slowdown in overseas economies but also to sluggish demand for IT-related goods."
"Reflecting such developments in final demand and the strong excess of inventories of electronics parts and some materials, industrial production continues to decline sharply," it said.
As a result, corporate profits and business sentiment "are also worsening particularly in the manufacturing sector."
The BoJ also noted that the slowdown in corporate activity is having a stronger negative impact on the household sector, resulting in consumer spending remaining "flat on the whole."
The bank said that household incomes "seem to be weakening gradually" as a result of the continued deterioration of the corporate activity.
Looking ahead, the BoJ said that under a prolonged adjustment in economic activity, particularly in production, "household incomes -- the basis of private consumption -- are likely to weaken gradually along with a decline in corporate profits."
Until last month, the BoJ had asserted that income conditions of households had not deteriorated.
The central bank also warned of sustained sluggish economic activity ahead, citing a downside risk in net exports and industrial output, as well as in corporate profits and capital spending. "Overall, it seems inevitable that the adjustments, starting from the decrease in exports, will continue for the time being," the bank said.
"Moreover, the substantial decline in production could cause domestic demand to decrease and in turn generate the risk of adjustments in economic activity spreading even further." The central bank said net exports are likely to maintain a falling trend.
In addition, the BoJ noted that business fixed asset investment "is projected to follow a downtrend" and that inventory adjustments in the IT sector and the base material sector will "continue for the time being."
The bank also said that due attention "should be paid to the risk of a negative impact on the economy induced by developments in foreign and domestic capital markets via corporate and household confidence." The central bank said deflationary pressure remains intact, adding that "overall, prices are expected to be weak for the time being." "Moreover, given the high degree of uncertainty regarding future economic developments, the possibility that weak demand will intensify downward pressure on prices warrants careful monitoring."
The bank however said Japan may see some relief from an expected pick-up in offshore economies, especially the US.
"There still exist such general views that around the end of this year, ongoing inventory adjustments in IT-related goods worldwide are likely to peak out and overseas economies, particulary the US, will start to recover.
"Based on these preconditions, exports are expected to pick up sometime in the future and thus underpin industrial production."