The economy is projected to grow a real 2.0 percent in fiscal 2008 on stronger capital investment but will probably rise just 1.3 percent in the current year ending March 31, the government said Wednesday.
The forecasts, approved at a Cabinet meeting, show that fiscal 2007 growth will be much slower than the previously forecast 2.1 percent, as stricter rules for obtaining building permits have caused housing starts to plummet to a four-decade low.
Slower growth may cause tax revenue to decline, making it more difficult for the government to eliminate the deficit and curb the world's largest public debt.
"The more the economy loses steam, the more difficulty the government will have in stoking economic growth through policy measures," said Takahira Ogawa, director of sovereign ratings at Standard & Poor's in Singapore.
Revenue from taxes could start falling, Economic and Fiscal Policy Minister Hiroko Ota said after the forecasts were published. Finance Minister Fukushiro Nukaga told reporters the government still wants to balance the budget by the year ending in March 2012.
The building slowdown will erase 0.6 percentage point from fiscal 2007 growth, the Cabinet Office said.
Housing starts plunged 35 percent in October and 44 percent in September because the regulations, introduced after an architect fabricated earthquake-resistance data in 2005 to cut costs, caused a logjam in building applications.
Prime Minister Yasuo Fukuda regrets the results of the building code changes, Chief Cabinet Secretary Nobutaka Machimura said Wednesday.
The instruction manual describing the housing construction permit process was issued six weeks after the rules were introduced on June 20. Ota this week called the lapse a "case of bad preparation."
Pent-up demand will help housing investment rebound next fiscal year, adding 0.4 percentage point to growth, the Cabinet Office said.