TOKYO – Japan’s economy continues to improve on the back of solid domestic demand, but external risks including trade tensions between the Unites States and China warrant caution, the government said Tuesday.

In the July edition of its monthly economic report, the Cabinet Office maintained its headline assessment that the world’s third-largest economy is “recovering at a moderate pace,” though it said there was “weakness continuing mainly in exports.”

The office had previously said in the June report that “weakness in exports and industrial production continues,” but this month it dropped the reference to weak production as output in some sectors including automobiles has leveled off.

An official at the office said exports bound for Asia are doing particularly poorly amid China’s economic slowdown and waning demand for high-tech products such as smartphones.

Business sentiment among Japanese companies “show cautiousness further,” the office said in its latest report.

The Bank of Japan’s Tankan survey showed this month that sentiment among large manufacturers worsened for the second straight quarter in June, largely due to the U.S.-China trade friction.

“We are closely monitoring the impact” of the trade tensions, the official said.

Still, Japan’s economy is thought to be on a relatively firm footing, having logged an unexpectedly strong 2.2 percent growth rate, annualized and adjusted for inflation, in the January-March quarter.

That will likely allow Prime Minister Shinzo Abe to go through with a planned increase in the consumption tax from the current 8 percent to 10 percent in October. He has said it would only be postponed in the face of a shock on par with the 2008 global financial crisis.

The employment situation is “improving steadily” and private consumption is “picking up,” while business investment is “on the increase at a moderate pace,” the report said.