"The Japanese economy is still picking up although the pace has decelerated, while difficulties continue to prevail due to the Great East Japan Earthquake," the Cabinet Office said in its October report.
The September report did not mention that the recovery was slowing.
Production and exports were also downgraded, with the report saying that the recovery in production is decelerating and that exports are leveling off.
The Cabinet Office's report said economic conditions abroad overshadowed the two components.
It also touched on the need to pay attention to the yen's persistent strength, which is generally unfavorable for exporters as it erodes the value of their earnings when repatriated.
"The global financial markets, the European economy (struggling under the sovereign debt crisis) and Japan's exports have shown a downturn larger than expected in these two months," a government official said, explaining why the overall assessment was downgraded just two months after upgrading it.
Automakers responded firmly to demand they couldn't meet when the nationwide supply chain was disrupted by the March 11 disasters, but such products as semiconductors did not see exports grow as expected, the official said.
The report, meanwhile, was more upbeat in assessing such components as public investment and employment.
The report said that public investment has been "holding steady recently," partly supported by demand for rebuilding the disaster zone. In the previous month, investment was seen as basically sluggish.
In its evaluation of overseas economies, the government maintained for the second consecutive month its view that the recovery of the global economy is "weakening as a whole."
"The U.S. economy is extremely weak and the pace of recovery in Europe is becoming slow. As for the outlook, it is expected that a weak recovery will continue, but there are risks that economic conditions will take a downturn."
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