TOKYO (Reuters) - Japan's manufacturing activity picked up in the third quarter, a survey showed, but economists say they need more information on wages and consumer spending to determine whether the government should raise the sales tax again next year.
An improving corporate sector is certainly welcome news for Japanese Prime Minister Shinzo Abe after the economy contracted sharply in the second quarter following the first of two increases in the sales tax.
But the government, which is monitoring third-quarter economic data to decide whether to raise the sales tax again, is likely to remain cautious for fear that consumer spending may not fully recover. Abe is to make a final decision by the end of the year.
"Conditions for Japan's manufacturers are improving, and this is in line with an improvement overseas," said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.
"However, Abe's policies rely more on households and the services sector."
The Markit/JMMA flash Japan Manufacturing Purchasing Managers Index (PMI) fell to a seasonally adjusted 51.7 in September from a final reading of 52.2 in August, but remained above the 50 threshold that separates expansion from contraction for a fourth straight month.
From July to September, the manufacturing PMI averaged 51.5, which is higher than the April-June average of 50.3 and shows that manufacturing is recovering, Miyazaki said.
The quarterly figures could ease fears that manufacturers would scale back production as stocks of unsold goods piled up after the tax hike.
In another encouraging sign, the output component of the flash PMI index rose to 53.4 from a final 52.9 in August to reach the highest level in six months.
Signs of rising factory output could help the economy recover from the shock of the April sales tax hike to 8 percent from 5 percent.
The increase dampened consumer spending more than many economists expected, triggering a 7.1 percent annualised contraction in the second quarter, and has taken some steam out of an expected third quarter rebound.
The government will analyse data for July-September to decide whether to proceed with a second sales tax hike to 10 percent scheduled for late next year.
The tax increases are needed to pay for rising welfare spending, but some politicians worry they will do too much damage to the economy.
Consumer spending has disappointed since the first sales tax hike, and data next week on household spending and retail sales will show whether or not things improved in August.
Japan's exports have also struggled to rise despite a weaker yen. Many companies have shifted production overseas, which robs the economy of an important growth engine that many policymakers were hoping would offset the blow from the tax hikes.
The Bank of Japan's Tankan survey is expected to show manufacturers were less optimistic in July-September and sentiment will improve only slightly in the following quarter.
Confidence at Japanese manufacturers fell the most in nearly two years in September, the monthly Reuters Tankan business confidence survey showed last week.
The report raised fresh doubts about the effectiveness of Abe's plan to reflate the economy, which hinges on a strong pick-up in both corporate and consumer spending.
Editing by Kim Coghill