Japan's government is considering downgrading its assessment of the economy next week as the intensifying Sino-U.S. trade war takes a toll on exports and factory output, a government source with direct knowledge of the matter told Reuters on Thursday.
A downgrade in the crucial monthly report could fuel speculation that Prime Minister Shinzo Abe may delay once again a planned sales tax increase set for October.
Speculation is swirling that Abe may delay the planned tax hike to 10% and call a snap election for parliament's lower house to coincide with an upper house poll this summer, at a time when Abenomics reflationary policy is sputtering.
Abe has delayed the planned hike twice as he prioritised economic growth over fiscal reforms. A previous tax increase to 8 percent from 5 percent in April 2014 hit consumers hard and triggered a sharp slump in the world's third-largest economy.
In its report in April, the government said Japan's economy was recovering gradually, despite signs of weakness in exports and output. It cut its economic assessment for the first time in three years in March.
Investors are closely watching whether the government will cut its economic outlook and if the word "recovery" remains in the report for May, especially after a fresh escalation in the U.S.-China trade war last week which saw both sides hike tariffs on each others' goods.
Japan is expected to report a mild economic contraction in the first quarter in data due on Monday, according to analysts polled by Reuters.
The economy may already be in recession, a government assessment of its own economic indicators showed on Monday.
The trade war is prompting the government to review its earlier view that exports and Read More