TOKYO, Oct 16 (Reuters) - Japan's economy has been picking up but lacks the drive of domestic demand, the government said in a monthly report on Friday, giving a bleaker view than the Bank of Japan.
"Although the economy has been picking up, it is short of autonomous factors and remains in a difficult situation such as having a high unemployment rate," the Cabinet Office said in the report, which left the overall assessment unchanged from last month.
It struck a bleaker tone than the BOJ, which upgraded its view on the economy on Wednesday, saying it was recovering.
The central bank's policy board deferred a decision on withdrawing support for corporate finance after the government pressed it to consider what the economic cost would be if it retreated from credit markets.
"The current economic improvement is led by exports and government stimulus ... but domestic private consumption, which we define as an autonomous component, remains weak," said Keisuke Tsumura, parliamentary secretary of the Cabinet Office.
"Uncertainty is strong about how personal consumption will fare this month and later because the employment and income situations are severe," Tsumura said.
The government said there is a risk the economy will be depressed by "the influence of fluctuations in the financial and capital markets," in response to the yen's sharp appreciation against the dollar.
That contrasted with the stance of by the BOJ, which maintained a view that "the financial environment, with some lingering severity, is increasingly showing signs of improvement".
Finance Minister Hirohisa Fujii said on Wednesday the economy may be in a more severe situation than the BOJ thinks, just as BOJ Governor Masaaki Shirakawa signalled the central bank may remove some corporate funding support measures in the near future.
Attention should also be given to a possible further worsening of the employment situation and concerns over a slowdown in overseas economies, the government report said.
Japan's economy rebounded in April-June from the worst recession in modern history thanks to government stimulus worldwide, including subsidies for low-emission vehicles. But economists worry that once the effect of stimulus fades the recovery could peter out.
The new Democratic Party-led government is currently working on a budget for fiscal 2010/11 starting next April to implement spending programmes aimed at putting more money into the hands of consumers.
The government upgraded its assessment of exports on strong demand in Asia for Japanese-made automobiles, steel and semiconductors.
The government also adopted a more positive assessment of business sentiment, after the BOJ's tankan quarterly survey for September showed business morale improved for the second quarter in a row. (Reporting by Rie Ishiguro; Editing by Michael Watson)