Japan's government on Tuesday kept its assessment of the overall economy unchanged in May but downgraded its view on capital spending after the March earthquake, tsunami and nuclear crisis damaged supply chains and production activity.

The government cut its view on capital expenditure for the first time since December 2009 as supply constraints made it difficult for corporations to make investments. But it also said Japanese firms' willingness to engage in capital spending had not waned, given relatively solid machinery orders data.

The economy is showing weakness recently due to the Great East Japan Earthquake, the government said in its monthly economic report in May, after cutting its view in April for the first time in six months.

The government's latest assessment is largely in line with the Bank of Japan, which also maintained its view on the economy last week, citing strong downward pressure, mainly on output, due to the impact of the earthquake, while keeping its ultra-easy monetary policy on hold.

The Cabinet Office's latest report said business investment has weakened recently because of the March disaster, compared with the April report's statement that it was picking up.

The government assessment came after data showed last week that the economy shrank much more than expected in the first quarter, following a mild contraction in the final quarter of 2010.

The second consecutive quarter of contraction technically puts Japan in a recession, although the government will make its own determination at a later time whether it officially views the economy as in recession.

At the moment, it is not our assessment that the economy has fallen into recession, said Shigeru Sugihara, director of macroeconomic analysts at the Cabinet Office.

He added that the economy had been on a recovery trend early this year, until the March catastrophe.

But we will be watching how long this weakness will continue, and if the economic recovery continues after June and July, we don't think the economy will be judged as being in recession.

The government stuck to its view regarding the economic outlook that the weakness will continue for a while because of the impact of the disaster but there will be a pick up in tandem with a recovery in production, reflecting solid overseas economies and the effects of various policy measures.

It also cautioned about downside risks to the economy that could stem from power supply constraints, slow progress in the recovery of supply chains, the effects of the nuclear disaster in Fukushima and rising oil prices.

We will be watching how power supply constraints will pan out and how corporations will handle that, Sugihara said.

In other key segments of the report, the government kept its views on factory output and exports unchanged, saying they have declined recently.

Most economists have forecast that the economy will suffer another contraction in April-June but will rebound in the second half of this year on reconstruction efforts and a recovery from supply constraints.

(Reporting by Kaori Kaneko; Editing by Edmund Klamann)

Japan Tsunami