Japan cuts growth forecast, prime minister warns of weak-yen pain

By Leika Kihara

TOKYO (Reuters) -Japan's government cut this year's growth forecast on Friday as consumption took a hit from rising import costs due to a weak yen, highlighting the fragile nature of the economic recovery.

But it projected growth to accelerate next year on robust capital expenditure and consumption, retaining its view the economy will sustain a domestic demand-led recovery.

Some members of the government's top economic council, however, voiced concern over recent weakness in consumption and the pain the yen's fall was inflicting on households.

"We can't overlook the impact a weak yen and rising prices are having on households' purchasing power," the private-sector members of the council told Friday's meeting that discussed the new growth forecasts.

"The government and the Bank of Japan must guide policy with a close eye on recent yen declines," they said.

Prime Minister Fumio Kishida told the meeting that the government must be vigilant about the impact rising prices, driven in part by a weak yen, can have on the economy, according to the Kyodo news agency.

The government releases its economic growth forecasts in January and then revises them around July. They serve as a basis for compiling the state budget.

In the revised estimates, the government cut its economic growth forecast for the current fiscal year ending in March 2025 to 0.9% from 1.3% projected in January.

The new forecast is above private-sector forecasts for 0.4% growth, reflecting government hopes that broadening wage hikes, tax cuts and an extension of fuel subsidies will boost consumer spending.

The government expects the economy to grow 1.2% in fiscal 2025, the estimates showed.

While a weak yen gives exporters a boost, it has become a source of concern for policymakers as it hurts consumption by inflating the cost of fuel and food imports.

The government is suspected to have intervened on several occasions this month to slow down the yen's decline, shifting the market's attention to whether the Bank of Japan would raise interest rates at its two-day policy meeting ending on July 31.

The BOJ is also likely to trim its growth forecast for this fiscal year at the meeting, reflecting a rare unscheduled downgrade to historical gross domestic product (GDP) figures, sources have told Reuters. It currently projects growth of 0.8% in the current fiscal year.

(Reporting by Leika Kihara; Editing by Stephen Coates and Neil Fullick)