In revised estimates presented at a meeting of Japan's top economic council, the government cut its inflation-adjusted gross domestic product growth forecast for the year ending in March 2026 to 0.7% from 1.2% projected in January.

The new forecast, still above private-sector forecasts for 0.5% growth, reflects worries that U.S. tariffs will make Japanese companies more cautious about capital expenditures and drag down exports, both key drivers of Japan's economic growth.

The outlook for private consumption, which accounts for more than half of Japan's economy, was also lowered as inflation continues to squeeze households.

The private-sector members of the economic council warned that inflation could further dampen consumer spending if it accelerates.

"The Bank of Japan should pursue its price stability mission and sustainably and stably meet it's 2% inflation target," the members said.

For the next fiscal year from April, the government projected growth to pick up slightly to 0.9%, retaining its view the economy will sustain a domestic demand-led recovery as it predicts wage growth will outpace inflation and boost private consumption.

The government maintained its outlook for delivering a primary budget surplus in fiscal 2026 for the first time in decades, predicting even a larger surplus of 3.6 trillion yen ($24.39 billion) thanks to higher tax revenues.

The primary budget balance, which excludes new bond sales and debt-servicing costs, is a key gauge of the extent to which policy measures can be funded without resorting to debt.

But the rosy outlook has not factored in potential tax cuts and cash handouts that the government has been considering amid growing pressure from the opposition for more aggressive spending to ease rising living costs.

Prime Minister Shigeru Ishiba's grip on power has been further weakened by a bruising defeat for his ruling coalition this month in upper house elections after having lost its lower house majority last October.

($1 = 147.5900 yen)