The upbeat outlook comes after Prime Minister Shinzo Abe's ruling party won upper house elections 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 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 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 indicate 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 percent 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.