Japan's government downgraded its assessment of the economy on Friday but maintained the view it was recovering, suggesting that escalating U.S.-China trade tensions have yet to hit growth enough to put off this year's scheduled sales tax hike.

"Japan's economy is recovering at a moderate pace, while weakness in exports and industrial production continues," the government said in a monthly economic report for May.

That was a slightly bleaker view than last month, when it said the economy was recovering moderately despite "some" weakness in exports and output.

The government also cut its view on output and capital expenditure, nodding to the growing pain from U.S.-Sino trade tensions and slowing Chinese demand. But it stuck to the view that domestic demand remains strong enough to moderate some of the pain from overseas headwinds, helping keep Japan's recovery intact.