The economy remained flat in May, the government said Tuesday. In its monthly economic report, the government also described the spread of severe acute respiratory syndrome as a risk factor.

It left its economic assessment unchanged for the third month in a row, stating that, "While the economy has become roughly flat, uncertainty still remains." This mirrors the wording used in the April report.

Dropping any reference to Iraq as a risk factor, the report instead cites SARS as a concern.

"The impact from SARS has been prolonged and the tourist industry was badly hit by it," Cabinet Office economist Jun Saito said.

In addition to SARS, the report also cites the future state of the U.S. economy and domestic stock prices as risk factors.

The report says the weekend announcement that the government will bail out cash-strapped Resona Bank was made "to prevent a financial crisis."

"We want to closely observe developments, as the case of Resona Bank could affect share prices and consumer sentiment, though it is unlikely to lead to a financial crisis," Saito said.

Regarding the short-term outlook, the report says "the economy is expected to move toward an incipient recovery if the recovery in the U.S. and other economies is sustained."

Corporate profits are improving and capital investment is showing "an incipient recovery," according to the report, which adds that the employment situation continues to be severe.

Industrial production is weakening, while both exports and imports are gradually increasing, the report says.

But exports to and imports from the U.S. continue to decline, mainly due to a drop in automobile exports and a decrease in aircraft imports.

Private consumption remains generally flat, while domestic corporate prices and consumer prices remain static, the report says.

Regarding overseas economies, the report revises downward the assessment of the Asian economy, stating that "expansion of the economy is slowing down." In the April report, the government said the Asian economy is "gradually expanding."

The government's assessment of the U.S. and European Union economies is unchanged from the April report.

The report states that the U.S. economy is continuing to expand, but that its resilience is weakening, and that the economy in the 12-member euro zone and Britain is slowing.