Japanese exports could be hurt by a slowdown in the US

The economy is forecast to expand by 2% in the 12 months from April 2008, although the government warned that a US slowdown could jeopardise this.

However, government minister Hiroko Ota said that in the current financial year, Japan would see GDP growth of 1.3% - lower than previously forecast.

The Bank of Japan is this week expected to peg interest rates at 0.5%.

Lacklustre growth and lingering deflationary pressures in the world's second largest economy mean that the bank is expected to refrain from raising its key rate until the latter half of 2008, analysts say.

Mrs Ota said that while domestic demand would be playing a key role in boosting the nation's economy, growth in consumption would be limited because "wage increases will likely continue to be moderate".

She also warned that if the slowdown in the US - Japan's largest export market - continued then next year's growth "may be lower than the projection".

Higher crude oil prices could also have an impact, Mrs Ota said.