* Government upgrades economic view on spending, exports
* Economics min Hayashi cautious as activity at low levels (Adds quote by economics minister)
By Stanley White
TOKYO, July 13 (Reuters) - Japan's government upgraded its economic assessment for the third straight month in July as private consumption gets modest support from government stimulus efforts, such as one-time payments to individuals.
The economy is expected to pick up in coming months as companies finish adjusting inventories, overseas economies improve and the effect of policy measures spreads, the government said in its monthly report released on Monday.
In the report, the government also upgraded its view of consumer spending for a second straight month as shoppers snap up low-emissions cars, flat-panel TVs and other home appliances that consume less energy and are eligible for subsidies under the government's stimulus plan.
But the report was cautious on the outlook for spending, as wages are falling and companies are cutting jobs. Volatility in foreign exchange and stock markets also posed risks to the economy, it said.
A Cabinet Office official also said there was a chance the economy could weaken again if overseas economies falter and once Japan's current stimulus package runs its course.
"You could compare the economy to being in a car accident," Economics Minister Yoshimasa Hayashi told reporters.
"We've entered hospital, had surgery and now is the time to slowly recuperate. Exports are recovering and government stimulus is slowly working, but the overall situation is still severe."
Japan's economy is expected to have grown a modest 0.4 percent in the April-June quarter after a record 3.8 percent decline in the previous quarter, albeit at sharply lower levels than a year ago.
But analysts expect any recovery to be fragile as many companies slash jobs and cut back on capital spending, weakening domestic demand.
"Japan's economy has recently shown signs of picking up while in a difficult situation," the July report said. That marked an upgrade from last month's assessment that only some parts of the economy are showing signs of picking up.
It is the first time since May 2002 that the government has raised its overall economic assessment for three straight months.
Private consumption has recently shown signs of picking up, the July report said, an upgrade from its previous view that parts of consumer spending are showing signs of bottoming out.
A government index measuring the overall trend of consumption rose 0.6 percent in May from a month earlier, the third straight month of gains, highlighting the improvement in spending.
As part of its record stimulus package compiled to beat a severe recession, the government said in April it would pay a subsidy of up to 250,000 yen ($2,703) for each purchase of an environment-friendly car and give back 5 percent of purchases of energy-saving home appliances in the form of purchase points.
Japan's parliament approved a plan earlier this year for 2 trillion yen in payouts to individuals.
"There is real improvement in spending due to government stimulus," Fumihira Nishizaki, Cabinet Office director of macroeconomic analysis, told reporters at a briefing.
"Still, there's uncertainty about overseas economies and the risks of a double dip certainly aren't small. We also need time to judge whether what we're seeing is only because of government stimulus."
The government left unchanged its assessment that the labour market is rapidly deteriorating, with the jobless rate likely to rise further from a 5-1/2-year high of 5.2 percent in May.
The government upgraded its view of exports to say they are picking up, reflecting improving shipments to Asia.
It maintained its assessment that industrial output is also picking up, as manufacturers claw back production cuts from last year. The government also stuck with its grim assessment of corporate profits and capital expenditure. (Editing by Chris Gallagher)