By Kaori Kaneko and Yuko Yoshikawa
TOKYO (Reuters) - Japan must raise its sales tax rate next year as scheduled to show it is serious about fixing up its tattered finances, the finance minister said on Tuesday as the government upgraded its view of the economy and said deflation was easing.
The sales tax is due to rise to 8 percent from 5 percent next April, and then increase to 10 percent in October 2015. Prime Minister Shinzo Abe has said he will decide later this year whether to go ahead with the increase, citing concerns it could weaken the economy.
Finance Minister Taro Aso said delaying the increase would go against commitments made to the G20 group of developed and developing nations that Japan would fix its finances, and said the government could take steps to mitigate any economic impact.
"We need to consider an extra budget. It's better to moderate economic fluctuations (from the tax hike)," Aso told a media conference after a cabinet meeting.
Earlier, the government upgraded its view on the economy for a third straight month, saying deflation was easing and growth was picking up due to massive monetary fiscal stimulus.
Still, plenty of work is needed to repair public finances.
Japan's public debt is the largest among major industrialized nations at more than twice the size of its 500 trillion yen ($5 trillion) economy, and the sales tax hike is considered a test of the government's commitment to reform.
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Abe, whose ruling bloc won a big victory in Sunday's upper house election, has vowed to push ahead with tough reforms but could face resistance from some in his party.
Some aides and lawmakers are worried the tax rise would weaken the world's third-largest economy just as it appears on the path to end 15 years on deflation. First-quarter data showed Japan was the fastest-growing major economy in the world.
Abe has indicated he would decide on the tax rise in autumn. Aso said the final decision should be based on revised April-June GDP figures released in September, rather than preliminary data due on August 12.
A government report on the long-term fiscal outlook said reforms were essential to maintain market confidence and ensure a sustainable recovery. It also noted that raising sales taxes in Europe did not necessarily damage growth.
In its economic report for July, the government upgraded its assessment of capital spending, factory output and business sentiment, and said there were signs of strength in exports and consumer spending.
"The economy is steadily picking up and it shows some movement towards a self-sustainable recovery," the Cabinet Office said. "Recent price developments indicate that deflation is easing." ($1 = 100.3950 Japanese yen)
(Additional reporting by Leika Kihara, Editing by John Mair)