The government downgraded its economic assessment for the third straight month Friday, citing the slowing of production activities, which had been fueling the fragile recovery.

“While movements of an incipient recovery can be seen in some areas of the economy, the state of the economy has weakened somewhat,” the Cabinet Office said in its report on the state of the economy for January.

In the December report, the office said, “Movements toward an incipient recovery are weakening, and the economic trend is generally flat.”

The last time the government lowered its assessment for more than one month was for five consecutive months from February 2001.

A Cabinet Office official briefing reporters said the main cause of the downgrade was a decline in industrial production, which lost steam because of flat exports, weak domestic demand and companies’ reluctance to build up inventories.

Exports have become “flat,” and “industrial production has declined somewhat,” the report says, lowering the assessment of production from flat in December.

But by saying exports were flat, the report reflects a slight upgrade from its assessment from December, when it had said exports were “declining somewhat.”

On the overall outlook, the Cabinet Office said whether the Japanese economy will improve hinges on the strength of other economies, particularly that of the U.S.

“As for short-term prospects, the economy continues to be expected to move toward an incipient recovery if the recovery in the U.S. and other economies is sustained,” the report says.

“On the other hand, there are concerns that the uncertainty surrounding the future of the world economy and sluggishness of domestic stock prices may still exert downward pressure on final demand,” it says.

The report comes at a time when the U.S. is gearing up for a possible war with Iraq.

The office downgraded the assessment of personal consumption in January by saying it leveled off as households suffered from weak income growth. It said in December that although consumption was flat, there was firmness in some areas.

It lowered the assessment of imports, saying the pace of growth is slowing.

It left the assessment unchanged for employment, saying that while job offers are on an increasing trend, “the employment situation continues to be severe, with the unemployment rate being at a high level.”

The office also left unchanged its assessments for corporate profits and business investment, saying profits are improving and capital investment is bottoming out.

The report says the government and the Bank of Japan “will also continue to take powerful and comprehensive action to emerge from deflation and to stabilize” the financial system.

Persistent price falls have been deadening Japan’s economic life by expanding debts, eating away at corporate profits and shrinking paychecks.

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