The forecast cuts follow disappointing data on quarterly gross domestic product and machinery orders, highlighting the growing downside risks posed by a trade war between the United States and China.
The government will use the forecasts to finalise the state budget for the next fiscal year starting in April, which could present policymakers with a host of challenges as they prepare to raise the nationwide sales tax.
Japan's economy will grow 0.9 percent in fiscal 2018, which ends in March, the Cabinet Office said. That is down from its previous projection of 1.5 percent growth.
In fiscal 2019 the economy will expand 1.3 percent, also down from the previous forecast of 1.5 percent growth.
Overseas demand will not contribute to growth either in the current or the following fiscal year due to a slowdown in China's economy and weak demand for electronic parts in Asia, a Cabinet Office official said.
Capital expenditure is expected to rise 3.6 percent in fiscal 2018 and then slow to 2.7 percent growth in fiscal 2019, partly because companies are cautious due to global trade friction, the official also said.
Overall consumer prices are expected to rise 1.0 percent this fiscal year, down from a 1.1 percent increase expected previously.
In fiscal 2019, overall prices will rise 1.1 percent, less than the previous forecast of a 1.5 percent increase.
Private consumption is expected to expand 0.7 percent this fiscal year and then accelerate to 1.2 percent growth in fiscal 2019, as consumers shake off the impact of a strong earthquake and heavy floods in September.
The government will raise the nationwide sales tax to 10 percent from 8 percent in October next year to help offset rising welfare costs.
The government has already planned for tax breaks and stimulus spending to offset any negative impact on consumer spending.
This stimulus, combined with an expected improvement in workers' wages, should prevent consumer spending from weakening, according to the official.
Japan's economy posted its biggest contraction in four years in July-September due to a fall in capital expenditure. The economy likely resumed expansion in the current quarter, but a row between Washington and Beijing over tariffs and trade policy is a threat to Japan's export-focused economy.
The government usually issues economic projections for the coming fiscal year in December when compiling the annual budget, and revises them around mid-year.