"The Japanese economy is picking up steadily and shows some movement on the way to recovery," the Cabinet office said in its July economic assessment.
The assessment said exports are picking up, industrial production is increasing at a moderate pace, corporate profits are improving and business investment is showing positive signs.
Kyodo News said the July assessment used the word "recovery" word for the first time in 10 months.
"Concerning short-term prospects, the recovery is expected to resume as the improvement of the corporate profits leads to increases in household income and business investment, while exports pick up and the effects of the policies develop," the Cabinet Office said.
But it also warned that "slowing down of overseas economies is still downside risk of the Japanese economy."
The report said the government will make its "utmost efforts" to overcome deflation early and achieve the revitalization of the Japanese economy.
Prime Minister Shinzo Abe's coalition government, which came to power in December, has made ending 15 years of chronic deflation its top priority. Abe's policies, known as "Abenomcis," have introduced a number of stimulus measures, including a weaker yen that helps exports and doubling the inflation target to 2 percent.
Abe's government has been considerably strengthened to pursue its policies after the coalition parties won a landslide victory in Sunday's upper house elections, giving them control of both chambers of Parliament.