By Leika Kihara
TOKYO (Reuters) - Japanese manufacturers' sentiment improved sharply in the three months to September to a near six-year high, a closely-watched central bank survey showed, cementing the case for Premier Shinzo Abe to proceed with a planned sales tax hike next year.
Service-sector sentiment also brightened slightly and big companies plan to increase capital spending, a sign robust personal consumption and a pickup in exports are solidifying a recovery in the world's third-largest economy.
The latest result made it a near certainty Abe will give the go-ahead of the tax hike on Tuesday, and compile a stimulus package to cushion the blow to the economy, analysts said.
"This is very constructive in terms of the assessment of the current economic situation. There is no reason that Abe should stop raising the sales tax," said Masamichi Adachi, senior economist at JPMorgan Securities in Tokyo.
But there were signs the improvement in mood may have peaked partly due to uncertainty on overseas economies, underscoring the challenge policymakers face in sustaining the positive momentum long enough to persuade firms to raise wages.
The headline index for big manufacturers' sentiment rose 8 points to plus 12 in September, much better than a median market forecast for plus 7, the Bank of Japan's "tankan" quarterly survey showed on Tuesday.
It was the third straight quarter of improvement and the highest reading since the survey of December 2007, suggesting that the feel-good mood generated by Abe's reflationary policies is broadening.
The sentiment index for big non-manufacturers also rose 2 points to plus 14 in September with hopes for bigger public works spending lifting morale among construction firms.
Abe has cited the tankan outcome as key factor in deciding whether to raise the sales tax from next April to 8 percent from 5 percent, which is part of a two-stage increase in the tax rate aimed at fixing Japan's tattered finances.
WAGES KEEP FALLING
Japan's economy expanded for three straight quarters in April-June, outpacing many G7 nations, as Abe's reflationary policies bolstered household spending and drove down the yen, benefiting exports.
The BOJ also offered an intense burst of stimulus in April, pledging to double the base money via aggressive asset purchases to achieve its 2 percent inflation target in two years.
Sentiment improved sharply for sectors that benefit from a weak yen, such as automakers and electronic goods makers. Big manufacturers revised down their yen forecasts for the current business year to 94.45 to the dollar, from 91.20 yen in the previous tankan survey.
But there were some signs of potential weakness in the outlook: Both big manufacturers and non-manufacturers expect business conditions to stay largely unchanged three months ahead, a sign the improvement in mood may have peaked.
Big firms plan to increase capital spending by 5.1 percent in the current fiscal year to next March, lower than 6.0 percent projected in a Reuters poll. That was largely unchanged from their plan three months ago, despite government plans to boost tax incentives to encourage companies into spending more.
"There's a gap between improving sentiment and the state of the real economy, which slowed somewhat in July-August as shown by recent indicators such as exports, factory output and consumption," said Naoki Iizuka, economist at Citigroup Global Markets Japan.
The BOJ raised its assessment of the economy in September to say it was recovering moderately but some officials worry about slowing growth in emerging economies, many of which are big markets for Japanese cars and electronic goods.
Another concern for policymakers is whether companies will finally start to raise wages, instead of sitting on a huge pile of cash, so that consumers have more money to spend.
So far, the signs are not good. Wage earners' total cash earnings fell 0.6 percent in the year to August with regular pay down for 15 months in a row, government data showed on Tuesday.
Separate data showed household spending fell 1.6 percent in August from a year earlier, a sign the rising cost of daily necessities may be weighing on consumer spending.
Such weak signs may be discussed at the BOJ's two-day rate review that ends on Friday, although the central bank is widely expected to keep its monetary settings unchanged.
The tankan's sentiment indexes are derived by subtracting the percentage of respondents who say conditions are poor from those who say they are good. A positive reading means optimists outnumber pessimists.
(Additional reporting by Stanley White and Tetsushi Kajimoto; Editing by Eric Meijer)