Japan's government is considering downgrading its assessment of the economy next week as the intensifying Sino-U.S. trade war takes a toll on exports and factory output.

A downgrade in the crucial monthly report could fuel speculation that Prime Minister Shinzo Abe may delay once again a planned sales tax increase set for October. Speculation is swirling that Abe may delay the tax hike to 10% and call a snap election for parliament's lower house to coincide with an upper house poll this summer.

Abe has delayed the planned hike twice as he prioritised economic growth over fiscal reforms. A previous tax increase to 8% from 5% in April 2014 hit consumers hard and triggered a sharp slump in the world's third-largest economy.

In its report in April, the government said Japan's economy was recovering gradually, despite signs of weakness in exports and output. It cut its economic assessment for the first time in three years in March.