Japan's economy will likely grow 2.5 percent in the fiscal year starting in April, the government said on Monday, as Prime Minister Shinzo Abe's ambitious fiscal and monetary policies boost domestic demand and a rebounding overseas economy helps exports.
The Cabinet Office's economic forecast, issued annually and revised every summer, will serve as a basis for the compilation of the government's budget, a draft of which is likely to be approved by the cabinet this week.
The government's projection for real gross domestic product is roughly in line with the Bank of Japan's estimate issued last week, but it is stronger than the median estimate for 1.8 percent growth in a Reuters poll.
The new forecast is also stronger than the previous projection of 1.7 percent growth made last summer.
"Exports are expected to grow as the global economy is likely to recover moderately, which would help corporate activity. The government measures will also help capital spending," an official from the Cabinet Office said.
"Also, employment is likely to increase, helped by the economic measures, which would boost private consumption."
Abe led his Liberal Democratic Party to a landslide victory in December and his campaign for aggressive budget and monetary stimulus has pushed the yen lower and sparked a stock market rally on hopes that a weaker currency will boost exports.
Earlier this month, the government approved a 10.3 trillion yen ($114.4 billion) economic stimulus plan, the biggest spending boost since the global financial crisis.
The government also said Japan was expected to achieve nominal gross domestic product growth of 2.7 percent in fiscal 2013, exceeding real GDP growth for the first time in 16 years.
There will be a rush of consumer spending before a planned sales tax hike in April 2014, which will boost growth by 0.4 percentage point for the next fiscal year, it said.
For the current year to March, the government cut its growth forecast for real GDP to 1.0 percent from 2.2 percent.
The consumer price index will rise 0.5 percent in the next fiscal year, after an anticipated 0.1 percent fall this fiscal year, according to the estimate, indicating there is still a long way to go to achieve the Bank of Japan's new inflation goal of 2 percent.
Under relentless pressure from Abe, the BOJ doubled its inflation goal and pledged open-ended asset buying from 2014.
The GDP deflator, a broad measure of price trends, will likely rise 0.2 percent in fiscal 2013 after declining 0.6 percent this fiscal year, the government estimated.
That would mark the first time since fiscal 1997 that the GDP deflator has risen, the government said.
It also noted that Japan needs to pay heed to risks such as Europe's sovereign debt, uncertainty in the overseas economy, foreign exchange movements and power supply restraints.
(Reporting by Kaori Kaneko; Editing Nick Macfie and Edmund Klamann)