TOKYO (REUTERS) - Japan's economy is showing some signs of bouncing back from prolonged deflation as a result of Prime Minister Shinzo Abe's monetary easing and budget spending to revive the economy, an annual government economic report said on Tuesday.

The nation needs to work on fiscal reform in the medium and long term even as it pursues aggressive stimulus steps to support the recovery and to help beat deflation, the white paper on the economy and public finance said.

Mr Abe, who took office last December, has pursued a bold policy mix that has sent share prices higher, weakened the yen and boosted business and consumer confidence.

His ruling bloc won a decisive victory in an upper house election on Sunday, ending six years of parliamentary deadlock and giving him a mandate for his recipe to revive the economy.

"The economy started to pick up from the beginning of 2013 and there are some indications it is turning around from its prolonged deflation," said the white paper compiled by the Cabinet Office.

Japan's core consumer prices were flat in May compared with a year ago, the first time in seven months that prices did not fall, partly reflecting rises in electricity prices.

A survey by the Bank of Japan has shown more than 80 percent of households expect prices to rise a year from now, the highest ratio in nearly five years, a sign that the bank's pledge to spur 2 percent inflation through its aggressive asset purchases may be changing public perceptions that deflation will persist.