Japan's government downgraded its view on the economy in February for the first time in three months on sluggish consumer spending, suggesting a bumpy path out of a recession in the face of slow wage recovery and lackluster industrial output.

The government also slashed its assessment on consumer spending for the first time in two years, saying a pickup seems to be "stalling", underlining the challenge for the Bank of Japan as it looks to exit its ultra-easy policy this year.

The downbeat assessment comes after data last week showed Japan's economy unexpectedly slipped into recession in the fourth quarter on weak domestic demand, losing its position as the world's third-largest economy to Germany.

"The economy is recovering moderately though it appears to be stalling recently", the Cabinet Office said in its report on Wednesday. It was the first downgrade since November 2023.

The lower assessment on consumer spending was due to a pause in recovery in service spending and a fall in spending on non-durable goods because of factors such as price hikes.

The nation's real wages fell for 21 straight months in December as inflation outpaced wage recovery and continued to weigh on household spending.

The suspension of some auto production and shipments prompted the government to cut its view on industrial output for the first time since March 2023. It said while industrial output was expected to pick up "production activity fell recently".

The production stoppage at Toyota Motor's small-car unit Daihatsu over safety issues have dented the auto output. Toyota also suspended shipments of some models after finding irregularities in certification tests for diesel engines developed by affiliate Toyota Industries.

Recovery in capital spending also appears to be "stalling", the report said, maintaining the same view from the previous month.

Firms' capital spending plans were solid but their investment has not been realized partly due to labour shortage, an official at the Cabinet Office said.

The government repeated it needed to pay "full attention" to an impact from the earthquake that killed about 240 in Japan's Noto peninsula on New Year's Day. Analysts have said the earthquake will have only a small impact on the economy in the short term.

(Reporting by Kaori Kaneko Editing by Shri Navaratnam)