The world's second largest economy is now "standing at the entrance of a deflation spiral," said Taichi Sakaiya, head of the Economic Planning Agency.

There is a "risk of being drawn into a deflation spiral if offshore economic conditions, including in the US, start to deteriorate rapidly and deeply," he added.

As Wall Street falls and the effect of the Russian economic crisis is felt across the world, stronger policies may be required from the Japanese government, he said.

"More bold policies steps may be needed if international economic conditions start deteriorating deeply," he said.

Sakaiya's comments came after his agency cut its assessment of the country's economic climate, saying consumer spending and private sector investment were weakening.

Heavy falls on Tokyo's stock market were now a source of concern, thereport said. Tokyo's Nikkei stock plummeted to a 12-year low in late August and is only slowly recovering.