The Bank of Japan on Tuesday downgraded its assessment of the economy for the first time in three months, saying growth is becoming increasingly sluggish.
The increased sluggishness in economic activity will likely persist over the next several quarters as the slowdown in overseas economies becomes more evident, the central bank said.
Exports have been falling because of the yen's advance and slower global growth, and the declines will continue, the BOJ said.
It kept its benchmark interest rate at 0.3 percent last week after a report showed the economy fell into its first recession since 2001. BOJ Gov. Masaaki Shirakawa said the outlook remains highly uncertain and the economy will take some time to recover.
Weakening overseas demand is triggering a slump in industrial output and declines in production will accelerate in the immediate future, the BOJ said.
It also said increases in consumer prices will moderate, removing the word gradually from its description of inflation.
Japans financial conditions have become less accommodative because large and small companies are having difficulty borrowing funds, the BOJ said. An increasing number of firms are postponing sales of bonds and commercial paper. As a result, large companies are borrowing more from banks, it said.