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TOKYO (Reuters) - Japanese retail sales growth accelerated for the third straight month in September in an encouraging sign that consumer spending could be strong enough to absorb a second sales tax increase scheduled for next year.
The 2.3 percent annual rise blew past a 0.6 percent increase expected by economists in a Reuters poll and marked the biggest gain since March. It followed a 1.2 percent rise in August.
Consumer spending has disappointed since the government raised the sales tax once in April, so evidence that a durable turnaround is imminent could make it easier for Tokyo to go ahead with a second hike in the tax to boost revenue for welfare spending.
Rebounding consumer spending is also a welcome sign for the Bank of Japan, as it tries to guide inflation to 2 percent some time next fiscal year to eliminate the risk of Japan falling back into deflation.
"The recovery in consumer spending is gaining pace because demand is improving," said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.
"Things are finally improving. Consumer spending will make a positive contribution to third-quarter gross domestic product."
Retail sales accelerated due to gains in apparel, food and beverage sales, data released by the Ministry of Economy, Trade and Industry showed on Tuesday.
An adviser to Prime Minister Shinzo Abe has been arguing that the government should delay a second increase in the sales tax to 10 percent from 8 percent scheduled for October 2015 as the economy is not strong enough.
The government has already raised the nationwide sales tax to 8 percent from 5 percent on April, as part of a two-stage plan to ease pressure on the national budget.
Abe has to decide by year-end whether to proceed with the second tax hike to curb Japan's mammoth debt burden, which at more than twice the size of its economy is the worst in the developed world.
A recent run of weak data on factory output and exports prompted the government to cut its economic assessment for two consecutive months, raising speculation that it may roll out more stimulus spending or push back the second tax increase.
People familiar with its deliberations said the BOJ is preparing to roughly halve its 1 percent economic growth forecast for this fiscal year at a meeting on Oct. 31 but stand pat on policy and its prediction that inflation will hit its 2 percent target in the year from next April.
Editing by Shri Navaratnam