TOKYO (AFP) - Japan on Tuesday lifted its view of the world's third-largest economy, as the government used the word "recovery" for the first time in nearly a year and hinted an end to deflation was near.

The upbeat outlook comes after Prime Minister Shinzo Abe's ruling party won upper house elections on Sunday, giving him more legislative muscle to press on with a big-spending programme aimed at boosting growth.

In its July report, the Cabinet Office gave its third monthly upgrade, saying: "The economy is picking up steadily and shows some movements on the way to recovery."

It is the first time it has used the word in 10 months.

Officials added that years of falling prices, which have crimped private spending and business investment, appear to be reversing course.

"Recent price developments indicate that deflation is easing," it said.

The comments from the government come after the Bank of Japan this month also used the word "recover" for the first time since 2011, pointing to a pick-up in investment as well as consumer and business confidence.

Voters on Sunday gave the thumbs up to Mr Abe's efforts to drag Japan out of long-running deflation with a mix of big government spending and monetary easing, similar to the US Federal Reserve's huge stimulus drive.

Official data indicates the efforts are working as consumer prices in May were flat from year-earlier levels, after half a year of declining figures.

The moves have also pushed the yen down sharply since late last year- giving a boost to exports - as the economy grew at an annualised rate of 4.1 per cent in the first quarter.

But, while the outlook was upbeat, an annual government report on Tuesday cautioned that the national debt, already the worst among industrialised nations at more than twice the size of the economy, had to be reined in.

"Improving Japan's fiscal health is a pressing issue, given sovereign debt crises" in Europe, it said.

Tokyo is set to make a decision later this year on hiking the nation's sales tax, which is seen as crucial for getting its fiscal house in order.

However, there are fears tax increases could bring a halt to Mr Abe's momentum, as Tokyo looks at ushering in painful structural reforms to the economy that have stirred concern among cosseted industries such as the farming sector.

"We need to generate a virtuous cycle that would see economic recovery lead to fiscal health, which in turn further contributes to recovery," the yearly report said.

On Tuesday, Chief Cabinet Secretary Yoshihide Suga, the government's top spokesman, said a final decision on the tax hikes would be made after studying "various data" including gross domestic product figures for the second quarter.