By Leika Kihara
TOKYO (Reuters) - Japan's economy expanded much faster than initially expected in the second quarter, adding to growing signs a solid recovery is taking hold and heightening the case for Prime Minister Shinzo Abe to proceed with a planned sales tax hike next year.
A marked improvement in capital expenditure led to an upward revision in April-June gross domestic product (GDP) to an annualised 3.8 percent expansion from a preliminary 2.6 percent increase, data released by the Cabinet Office showed on Monday.
The expansion, which roughly matched a median market forecast for a 3.7 percent increase, underscores the strength of Japan's recovery and boosts the chance the government will proceed with a two-staged increase in the sales tax.
It was the third straight quarter of increase following a 4.1 percent growth in January-March.
On a quarter-to-quarter basis, GDP growth was revised up to a 0.9 percent increase from a preliminary 0.6 percent.
Japan emerged from recession in 2012 and data for much of this year has shown the benefits of Abe's reflationary policies and the BOJ's aggressive stimulus.
Preliminary GDP data for April-June fell short of market forecasts due to weaker-than-expected capital spending, casting doubt on whether the tax hike will proceed as scheduled.
But capital expenditure was revised up to a 1.3 percent rise from the preliminary 0.1 percent decline, suggesting that improving business sentiment is prompting companies to spend more on plant and equipment.
The data gives the government more ammunition to counter critics of the tax hike, who have called for a delay or watering down of the increase on the view Japan's economy is still too weak to weather the pain.
Abe has made ending economic stagnation among his key policy priorities, but must also be mindful of fixing Japan's tattered finances with public debt having ballooned to double the size of its $5 trillion (3.19 trillion pounds) economy due to past fiscal stimulus and the rising social welfare costs for a rapidly ageing population.
The government has cited revised GDP data as among key factors in deciding whether to go ahead with lifting the sales tax to 8 percent from 5 percent next April, and to 10 percent in October 2015. Abe is expected to make a decision early October.
(Additional reporting by Stanley White; Editing by Eric Meijer)