The yen has dropped more than 10 per cent in recent months, reaching its lowest level since July 2010. Share prices have surged in anticipation that higher stimulus spending will boost economic activity, and that the weaker yen will aid exporters.
The Cabinet office's earlier estimate for growth in the fiscal year that starts April was 1.7 per cent. It expects inflation-adjusted growth of 1.0 per cent in the current fiscal year.
The consumer price index is forecast to rise 0.5 per cent, less than the inflation target of 2 per cent announced by the central bank and the government last week after lobbying by Prime Minister Shinzo Abe.
Abe took office a month ago and has made his top priorities reviving the economy and ending a prolonged spell of deflation — falling prices that can dampen investment and growth.
The revised forecasts assume the yen will average 87.8 yen per U.S. dollar in fiscal 2013, compared with 81.9 yen per dollar for this fiscal year.
The benchmark Nikkei 225 stock index topped 11,000 for the first time since April 2010 early Monday before falling back to close 0.9 per cent lower at 10,824.30.
The yen was trading at 90.68 to the dollar late Monday, after briefly hitting 91.06.