Japan govt upgrades economy view, says deflation easing

By Kaori Kaneko

TOKYO (Reuters) - Japan's government upgraded its view on the economy for a third straight month in July, saying deflation was easing and growth was picking up due to its policies of aggressive monetary stimulus and generous state spending.

That outlook, which is in line with the Bank of Japan's view, is a boost for Prime Minister Shinzo Abe, who vowed to stay focused on reviving the economy after his coalition won a strong victory in Sunday's upper house election.

"The economy is steadily picking up and it shows some movement towards a self-sustainable recovery," the Cabinet Office said in its monthly economic report on Tuesday.

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

A separate government report said the nation needed long-term fiscal reform to support the recovery and beat deflation, which has strangled the economy for 15 years.

The government upgraded its assessments on capital spending, factory output and business sentiment as confidence recovered and a softer yen helped to boost corporate earnings, which it said should feed through to incomes and investment.

"We need further recovery in firms' capital spending and the income situation" before the recent bright signs in the economy can be termed a clear recovery, a Cabinet Office official said.

Capital spending was "levelling off and shows some movement towards picking up", the report said, while industrial production was "increasing at a moderate pace" and business sentiment was improving.

The economy grew at an annualised 4.1 percent rate in January-March.

FISCAL REFORM

The report on long-term public finances said fiscal discipline was needed to maintain market confidence and prevent a sudden spike in interest rates.

Japan's public debt is already more than twice the size of its 500 trillion yen economy, the largest among major industrialised nations after years of fiscal spending to try to jump-start the stagnant economy, and a planned sales tax hike is considered a test of the appetite for fiscal reform.

The government will decide later this year on whether to go ahead with a scheduled increase in the sales tax rate to 8 percent next April from 5 percent, the first step in a planned a planned doubling of the levy buy October 2015.

Abe has concerns that raising the tax rate could damage the economy. The government report, however, said the experience in Europe was that raising consumption taxes did not necessarily damage growth.

(Reporting by Kaori Kaneko; Editing by John Mair)