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[TOKYO] Japan's government lowered its assessment of the economy in March for the first time in five months due to weakness in consumer spending, a move likely to reinforce views that more fiscal stimulus will be needed to keep the economy growing.
Some of Prime Minister Shinzo Abe's advisers and prominent overseas economists have been calling for Japan to delay a consumption tax increase slated for next year and increase fiscal spending to bolster domestic demand.
Mr Abe has said he will raise the tax as scheduled unless there is a financial crisis or large natural disaster, but there is lingering speculation that Mr Abe will abandon the plan if economic growth in the current quarter is weak.
"Japan's economy remains on track for recovery, but more weak spots in the economy can be seen," the Cabinet Office said in its monthly economic report on Wednesday. "However, there are downside risks, including the slowing down of emerging economies. We need to also pay attention to financial overseas markets."
That marked a downgrade from last month, when the Cabinet Office said weakness in the economy was still limited.
The government lowered its assessment of consumption to say consumer spending is flat and that consumer sentiment is stalling.
It did upgrade its assessment of capital expenditure and exports, but some economists have expressed more caution because a renewed slowdown in overseas economies could quickly cause exports and business investment to fall.
The government will start spending a US$27 billion stimulus package this month. One of the highlights of the package is an increase in cash handouts to pensioners.
However, there is talk among politicians in Japan's ruling party that even more stimulus is needed to prevent a return to deflation.
Japan's economy, the world's third largest, shrank an annualised 1.1 per cent in October-December. Most economists expect some rebound this quarter but concern about weak global demand has led some to predict another contraction that will push the country back into recession - defined as two straight quarters of economic contraction.
The Bank of Japan stunned global markets in January by adding negative interest rates to its massive asset-buying programme as it struggles to reflate the long-moribund economy. It is widely expected to increase its asset purchases again in coming months if there are no signs of improvement.