The government on Wednesday lowered its view of the Japanese economy in February, the first downgrade in three months, as it turned more cautious about the strength of private consumption and production.
With the recent revelation that Japan slipped into recession late last year, the government cut its assessment of private consumption for the first time in two years. It reflects a diminished contribution from COVID-related pent-up demand for services, which had previously supported the economy despite the rising cost of living.
The monthly economic report by the Cabinet Office also took a cautious stance on production after a series of safety test scandals engulfing Toyota Motor Corp. group firms, Daihatsu Motor Co. and Toyota Industries Corp.
"The Japanese economy is recovering at a moderate pace, although it recently appears to be pausing," the report said, dropping the phrase "in part" after the word pausing in the previous report.
Japan's gross domestic product fell an annualized real 0.4 percent in the October-December quarter, data released last week showed. On a nominal basis, the nation ceded its position as the world's third-largest economy to Germany in 2023, now ranking fourth.
Wednesday's economic report called for vigilance against the effects of aggressive interest rate hikes overseas, a slowdown in the Chinese economy, and the conflict in the Middle East.
"In addition, full attention should be given to the economic impact of the 2024 Noto Peninsula Earthquake" that hit Ishikawa Prefecture and nearby areas in central Japan on New Year's Day, it added.
Among key components of the economy, the recent pick-up in private consumption, accounting for more than half of GDP, "appears to be pausing," the report said, in the first downgrade since February 2022.
Consumers cut back on spending amid rising prices of everyday goods while warm temperatures limited demand for winter clothes, according to the government. Japan's inflation has been easing in recent months, but households have yet to feel wage growth when inflation is taken into consideration.
The government maintained that the recent pick-up in business investment "appears to be pausing," and export growth is also pausing recently.
The report comes when financial markets expect that the Bank of Japan will end its negative interest rate policy this spring after confirming the pace of wage growth during the latest round of negotiations between labor unions and management.
The BOJ emphasizes wage growth as it aims to achieve stable inflation supported by domestic demand. "Consumer prices have been rising moderately recently," the government report said.
The Cabinet Office upgraded its view of the U.S. economy for the first time since August last year, saying it is "expanding." It last used the term to describe the world's largest economy in June 2006.
The overall assessment of the global economy remained the same for the 10th straight month, saying it is "picking up despite weakness in some regions"
