By Kaori Kaneko
TOKYO (Reuters) - Japan's government raised its economic growth forecast for the next fiscal year thanks to its latest stimulus package aimed at speeding up the recovery following the damage wrought by the coronavirus pandemic.
The economy is expected to grow 4.0% in price-adjusted real terms in the next fiscal year starting April 2021, the latest estimate by the Cabinet Office showed on Friday.
The new estimate compared with its previous forecast of 3.4% growth projected in July.
The upgrade was underpinned by the government's third supplementary budget, which was approved earlier this week, to fund the $708 billion stimulus package to help the economy recover from its COVID-induced slump in the second quarter.
The forecast 4.0% growth for next fiscal year would be the fastest annual expansion on record, if realized, since comparable data became available in 1995, the Cabinet Office said.
The government, which expects the economy will return to pre-COVID-19 levels by January-March 2022 helped by its broad policy support, also cautioned about risks.
Policymakers need to keep a close watch "on downside risks to the economy in Japan and overseas from the pandemic and impacts from moves in financial capital markets," an official at the Cabinet Office said.
The government will use the forecasts to finalize the state budget for the next fiscal year.
For the current fiscal year that ends in March 2021, the government cut its gross domestic product forecast to a 5.2% contraction, which would be the biggest annual slump on record.
Previously, it projected the economy to shrink 4.5%.
Consumer prices remain subdued due to weak domestic demand and the government' discount travel campaign to support the tourism industry.
Overall consumer prices are forecast to fall 0.6% for this fiscal year, from a 0.3% decline expected previously.
In fiscal 2021, overall prices will grow 0.4%, the government said, revised down slightly from the previous forecast of a 0.5% increase.