This was after exports growth slowed last month as the trade surplus turned into a deficit, thanks to the high cost of fuel imports and the 22% fall in shipments to the US and weaker exports to Europe and China.
Inflation hit an annual 2.4% at the consumer level as well, the second month above 2%, which is high for Japan.
Yesterday's release of these figures came a day after the new government of Prime Minister Taro Aso approved a $US17-billion emergency budget to stimulate the economy.
The plan includes measures to help consumers, companies and farmers cope with high fuel costs and the financial markets meltdown.
The government sent the budget proposal - which was drafted by Aso's predecessor Yasuo Fukuda but stalled due to political turmoil - to parliament, where the opposition controls one house and is likely to resist the proposal to score points and try and force a national election.
The budget is part of an 11.7 trillion yen emergency package announced by Fukuda in late August, three days before he surprisingly quit as PM.
The Trade Ministry said factory output fell by more than the 2.4% decline estimated by economists and the most since the current index began in 2003.
The unemployment rate was a touch higher than the 4.1% expected by the market, both seen as signs that the economy is doing it a bit tougher than most people believe.
The 22% drop in Japanese exports to the US was the largest fall on record in August and was taken as a strong indicator of the slowdown in the US, especially in the car, capital goods and consumer entertainment and technology sectors.
Japan's three biggest car makers, Toyota Motor Corp, Honda, and Nissan Motor Co, all cut domestic production in August: Toyota chopped its global production by 17%.
The Trade Ministry said that companies were forecasting a recovery in production in September before slipping again in October.
We will get a better idea of what companies are forecasting when the quarterly Tankan business survey is released later today by the Bank of Japan.
According to companies surveyed by the Trade Ministry, even if September's gain were to be achieved, output would fall 1.1% for the quarter, the third straight decline.
Already economists forecast that the Tankan will show confidence levels among big Japanese companies has fallen to a five year low.
The outlook is expected to be especially cautious, gloomy even.
Companies are expected to have lowered expectations about exports, something the Economy Minister Yosano has picked up on. He said last week that the economy wouldn't pick up until export performance improved.
Growth in China, which in July surpassed the US as Japan's biggest export destination, has slowed for four quarters and both Toyota and Honda have cut production in the country as demand for cars softens.
Chinese steel production is easing and so is demand for Japanese steel productions.
That's why reports from India should be of considerable worry to Australian resource investors and companies.
Indian iron ore exporters warn that demand from steel mills in China has fallen sharply in the past month and that Chinese buyers are defaulting on contracts with suppliers.
Shipments from Brazil are also down as the huge CVRD (Vale) exporter tries to push through a price rise to match Australian price levels. Plunging costs for bulk carriers (down 70% in five months) hasn't attracted an upsurge in demand either.
Brazil is reported to have low stocks of iron ore as Vale tried to get the price rise approved, but there's little chance of that, given the worsening outlook for production. Those reports have been rising in intensity for the past month.
There are reports of rising coal stocks in China's eastern ports and the Australian coal price (based on Newcastle) has fallen to its lowest point in six months.
Analysts say smaller Chinese steel mills are losing money on their output because of weak steel demand and the hefty prices they paid for ore and coal ahead of the Olympics in August. High prices for steaming coal have also forced many power generators out of business or to cutback to try and remain viable.
Chinese steel companies report flat to sliding demand from whitegoods, construction and car makers.
