The government on Tuesday kept intact its relatively upbeat assessment of the economy in its monthly report for August, but it expressed concern over the aftermath of the consumption tax hike to 8 percent.
"The Japanese economy is on a moderate recovery trend and the reaction after a last-minute rise in demand before the consumption tax increase is easing," the Cabinet Office said in the report.
Looking ahead, the office said the economy is "expected to recover" but warned that if the adverse effects of the April 1 tax hike linger for an extended period, it will become a risk factor for economic growth.
"Attention should be given to the downside risks to the Japanese economy such as a lengthening of the reaction after the last-minute rise in demand and the slowing down of overseas economies," the report said.
In August, the office raised its assessment of housing construction, which has languished due to the tax increase, for the first time in 13 months, saying the pace of decline has "recently become moderate."
Housing starts nationwide fell for the fourth straight month in June, down 9.5 percent from a year earlier. But the pace was slower than a 15.0 percent plunge in May.
The government, however, downgraded its assessment of corporate profits, noting their improvement "appears to be pausing" with the tax hike blurring the economic outlook.
The office also maintained its slightly negative views on consumer spending and industrial output.