TOKYO - Japanese industrial output rose 0.5 percent in October and manufacturers forecast further rises in the following two months, easing some concern that the economy could slow to a standstill or even contract early next year.

But the yen's rise to a 14-year high against the dollar last week is hurting Japanese manufacturers' profitability and could derail an export-driven recovery in the economy.

The government is considering including measures to deal with the recent surge in the Japanese yen in an economic stimulus package it plans to compile this week.

"Given the yen's appreciation and the Dubai credit scare, companies may cut capital spending further in future. The Bank of Japan, as a result, is likely to come under pressure to respond to this new phase of economic worries," said Yasuhiro Onakado, chief economist at Daiwa SB Investments.

The government, worried about the risk of another recession, is putting pressure on the BOJ to do its part to support the economy, although the central bank has said there is little it can do beyond keeping rates very low to push up prices.

But with pressure mounting for further action, BOJ Governor Masaaki Shirakawa may use stronger phrasing than usual to describe the central bank's concerns about deflation when he speaks in Nagoya, central Japan, on Monday.

While he is unlikely to explicitly say whether the BOJ may take further action to support the economy, comments from him expressing stronger worries about deflation may be interpreted by markets as signalling an increasing chance of future BOJ action.

Finance Minister Hirohisa Fujii said that he would not intervene in currency markets and that now was the time to monitor the markets, Japan's Mainichi Shimbun daily reported on Monday.

The rise in October production was smaller than the 2.5 percent increase expected by economists and the 2.1 percent increase in September.

For a graphic on output click http: r.reuters.com/dam93g

Manufacturers surveyed by the Ministry of Economy, Trade and Industry expect output to rise 3.3 percent in November and increase 1.0 percent in December, data showed on Monday.

A rebound in the manufacturing sector has been driving Japan's recovery since earlier this year.

The economy grew 1.2 percent in July-September after a revised 0.7 percent expansion the preceding quarter.

While strong growth in Asia is expected to continue to underpin a recovery in Japanese companies' production of cars, electronic devices and steel, the recovery in output is expected to slow as companies remain cautious on the global economic outlook.

The yen's sharp rise over the past week is also clouding the outlook. The yen hit a 14-year high against the U.S. dollar on Friday.

Output has only recovered about a half of the steep decline it suffered after the banking meltdown in the United States and Europe in September last year, despite its strong recovery during the past half year.

Some analysts are also worried that output of cars, one of Japan's key export products, could lose momentum as the boost from scrappage schemes worldwide starts to fade.

A separate survey showed Japanese manufacturing activity fell to a four-month low in November.