JAPAN’S government downgraded its assessment of the economy Friday but maintained the view it was recovering, suggesting that escalating trade tensions have yet to hit growth enough to put off this year’s scheduled sales tax hike.

The fallout from the trade war and slowing global demand have clouded the outlook for the export-reliant economy, keeping alive market expectations that Prime Minister Shinzo Abe may postpone a twice-delayed increase in the sales tax in October.

But Economy Minister Toshimitsu Motegi shrugged off such speculation, saying Japan should proceed with the tax hike.

Japan needs revenues to pay for bulging welfare costs to support a fast-ageing population and curb the industrial world’s heaviest public debt burden, which is twice the size of its $5 trillion economy.

“There’s no change to our plan to raise the sales tax as scheduled,” he told reporters after the report was issued.

“I don’t think things are that bad. Manufacturing is affected by the U.S.-China trade dispute. But if you look at the supply side of our economy, manufacturing accounts for only 21%,” he said, adding that the service sector that makes up a bulk of the economy is doing well, with consumption “holding up.”

A senior ruling party lawmaker close to Abe was more cautious.

The tax hike should go ahead if the economy remains in the present state, but the government must scrutinize developments in Sino-U.S. trade talks and their impact on Japan’s economy, said Katsunobu Kato, head of the general council at Abe’s ruling Liberal Democratic Party (LDP).

“The biggest factor to look out for is the Sino-U.S. trade friction,” Kato said. “Global economic developments change all the time, so we need to watch out for them.”

If the tax increase deals too much of a blow to the economy, the government can take steps to prop up growth and the central bank could be called upon to help revive the economy, Kato added.

In its economic report for May, the government described the world’s third-largest economy as “recovering at a moderate pace, while weakness in exports and industrial production continues.”

That was a slightly bleaker view than last month, when it said the economy was recovering moderately despite “some” weakness in exports and output. (SD-Agencies)