By Leika Kihara
TOKYO (Reuters) - Japan downgraded its assessment of business sentiment and warned that global trade tensions could cloud the economy's recovery prospects, a sign that policymakers are increasingly worried about damage the U.S.-China trade dispute could inflict on growth.
In its monthly report for July released on Thursday, the government kept intact its assessment for a seventh straight month that Japan's economy was "recovering at a moderate pace".
But it said business sentiment was "almost flat," a bleaker view than in June when it said the mood was improving.
The downgrade came after a Bank of Japan survey showed business confidence worsened for a second straight quarter in April-June, reflecting companies' jitters over U.S. President Donald Trump's protectionist policies.
The government added a warning in the report that it must be "vigilant" about the impact that trade frictions between the United States and China could have on the global economy.
Attention must also be paid to the economic fallout from the heavy rain and flooding that struck western Japan earlier this month, the report said.
"The damage from the heavy rain has been broad-based," and could affect the economy through disruption in plant operations and supply chains, as well as damage to infrastructure such as expressways and railroads, the report said.
Japan's economy contracted in the first quarter on weak private consumption, ending the longest growth streak since the 1980s bubble economy, as firms remained wary of raising wages.
Analysts expect growth to rebound in the second quarter, though some say escalating trade frictions could weigh on the export-reliant economy and discourage firms from boosting capital expenditure. Second quarter growth data will be announced on Aug. 10.