TOKYO (AFP) - Japan's economy is set to grow by 1.3 percent this fiscal year, much less than previously expected as soaring commodity and food costs hit companies and consumers, the government said Tuesday.

In January the Cabinet Office had predicted that Asia's largest economy would grow by 2.0 percent in the current fiscal year to March, but business investment and household spending have been weaker than expected since then.

"There are concerns about the prospect of the real US economy entering a recession, and it's unavoidable that any US slowdown would have an impact on the world economy," said Japanese Finance Minister Fukushiro Nukaga.

Therefore, "there are risks of Japan's economy slowing more," he told reporters before the downgrade to the outlook.

Corporate investment in new equipment and factories is now expected to rise a tepid 0.6 percent this year, against an earlier forecast for a 3.3 percent gain, as companies battle soaring commodity costs and a stronger yen.

Consumer spending, adjusted for inflation, is projected to increase by 1.0 percent instead of 1.3 percent, the Cabinet Office said, blaming rising food and energy prices.

"Tough economic conditions have been continuing since the start of the year," Japanese Economic and Fiscal Policy Minister Hiroko Ota told reporters.

Consumer prices will rise 1.7 percent this fiscal year, far beyond the previous forecast for a 0.3 percent gain, the Cabinet Office predicted.

Economic growth is expected to pick up slightly to 1.6 percent in the year to March 2010, it said.

The economic growth projection for the current year is slightly more optimistic than that of the country's central bank, which last week trimmed its forecast to 1.2 percent from 1.5 percent.

Japan's economy is on the mend from a slump stretching back more than a decade, but analysts say rising energy and raw material costs along with falling exports to the United States are putting the brakes on the recovery.

In a separate report, the Japanese government said that the country's investors and households needed to take more risks to spur growth that has been sapped by high oil prices and a faltering US economy.

"It is important that the Japanese corporate and household sectors take risks. Unless they take risks, growth cannot be attained," the white paper said.

A slowdown in US growth, soaring oil and raw material prices and movement of financial markets posed short-term risks to Asia's largest economy, it warned.

It also noted that salaries of Japanese workers have not been rising, despite growing corporate earnings.

While oil prices inflated the value of imports, the value of Japanese exports remained flat, as Japanese firms hesitate to increase their prices due to competition from other Asian firms, the white paper said.

- Dow Jones Newswires contributed to this story -

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