The government believes the economy is "further deteriorating" due chiefly to larger falls in exports and output plus a dip in investment.
The downgraded view of the economy -- the first in two months -- came in the government's monthly report for August, released Friday.
The report adds "further" to last month's view that the economy is deteriorating, referring both to the continuation and depth of deterioration first acknowledged in June, said Haruhito Arai, director for economic analysis at the Cabinet Office.