"The Japanese economy is recovering at a moderate pace, although it appears to be still pausing in parts," the Cabinet Office said in its monthly economic report for August, raising the assessment for the first time since May 2023.

Consumption is picking up as the impact of shipping stoppage at some automakers is easing, the government said. The increase in household disposable income, coupled with temporary cuts in income and resident taxes, also helped consumption.

However, the extreme heat this summer yielded mixed consumption results, the report said. While demand for air-conditioning, parasols and ice creamed increased, customer traffic at theme parks and restaurants declined.

The report also anticipated a fall in import prices, primarily due to the recent correction in the yen's weak trend.

The government also upgraded its assessment on housing construction to "almost flat" from "in a weak tone" for the first time in more than two years, attributing the change to a halt in the decline of owner-occupied house construction.

Assessments for the remaining sub-sectors, including exports, remained unchanged.

The report was presented at a meeting attended by relevant cabinet ministers and Bank of Japan (BOJ) Governor Kazuo Ueda.

Earlier this month, government data showed Japan's economy expanded by a much faster-than-expected 3.1% annualised rate in the second quarter. The rebound, after a slump at the start of the year, was largely attributed to a robust increase in consumption.