TOKYO (REUTERS) - Japan's government lowered its economic assessment and highlighted risks posed by China and a US interest rate hike, adding to signs that a shock from overseas could hurt Japan's outlook.
The Cabinet Office said in its September report that Japan's economy was on track to recover but acknowledged some parts of the economy had slowed, striking a less optimistic tone versus last month as consumer spending, exports and capital expenditure proved disappointing.
Prime Minister Shinzo Abe is trying to breathe new life into his economic agenda, and the monthly economic report suggests this task is becoming more urgent as obstacles to achieving strong economic growth multiply.
"There are downside risks to Japan, because China and other emerging Asian countries are slowing as the United States heads toward normalising monetary policy. We need to keep an eye on developments in financial markets."
The Cabinet Office did not use the word "downgrade" in its monthly report, but a government official told reporters its assessment was more pessimistic compared to last month, when it said the pace of improvement in the economy is patchy.
The last time the Cabinet Office downgraded its assessment was in October last year.
It left unchanged an assessment that consumer spending had reached a plateau, but noted capital expenditure is showing signs of recovery, an assessment also unchanged from last month.
In addition, the Cabinet Office expressed concern that consumer spending and business investment have been slow to respond to an improving labour market and record corporate earnings.
Labour demand is the highest in decades, but rising food prices have caused households to cut back on other spending.
Some economists also worry that lacklustre exports could cause companies to scale back capital expenditure plans.
Exports are weakening, the Cabinet Office said, a factor unchanged from the previous month.
The dour assessment of the outlook comes at a sensitive time for the Bank of Japan.
Some economists speculate the central bank could ease policy as soon as next month because consumer prices are undershooting its inflation target.
Investors are still worried about China's slowing economy after the government there had to intervene heavily to curb a panic sell-off in Chinese shares.
The US Federal Reserve is inching towards raising interest rates from zero, and there are concerns such a step could rattle the global economy by triggering big capital flows to the US.