TOKYO - JAPAN'S economy is set to grow by 1.3 per cent this fiscal year, much less than previously expected as soaring commodity and food costs hit companies and consumers, the government said on Tuesday.

In January the Cabinet Office had predicted that Asia's largest economy would grow by 2.0 per cent in the current fiscal year to March, but business investment and household spending have been weaker than expected since then.

'There are concerns about the prospect of the real US economy entering a recession, and it's unavoidable that any US slowdown would have an impact on the world economy,' said Japanese Finance Minister Fukushiro Nukaga.

Corporate investment in new equipment and factories is now expected to rise a tepid 0.6 per cent this year, against an earlier forecast for a 3.3 per cent gain, as companies battle soaring commodity costs and a stronger yen.

Consumer spending, adjusted for inflation, is projected to increase by 1.0 per cent instead of 1.3 per cent, the Cabinet Office said, blaming rising food and energy prices.

Consumer prices will rise 1.7 per cent this fiscal year, far beyond the previous forecast for a 0.3 per cent gain, it predicted.

Economic growth is expected to pick up slightly to 1.6 per cent in the year to March 2010, it said.

The government's economic growth projection for the current year is slightly more optimistic than that of the country's central bank, which last week trimmed its forecast to 1.2 per cent from 1.5 per cent.

Japan's economy is on the mend from a slump stretching back more than a decade, but analysts say rising energy and raw material costs along with falling exports to the United States are putting the brakes on the recovery.