By Leika Kihara
TOKYO (Reuters) - Japan's factory output rebounded in September to its highest level in nearly one-and-a-half years as robust domestic demand driven by the government's stimulus policies and a looming tax rise compensated for slowing exports to the rest of Asia.
The gain reinforces the view the world's third-largest economy is recovering moderately, and may nudge more firms to meet Prime Minister Shinzo Abe's requests to raise base salaries next year.
One caveat is that demand may be being inflated as consumers bring forward purchases to beat an increase in the sales tax from next April, and so may soften into the middle of 2014.
Still, some executives of Japan's big car and electronic makers have recently sounded upbeat about the prospects for salary increases after keeping wages largely flat amid two decades of economic stagnation.
"It does seem like Japanese large corporates are at least saying they are willing to think about raising basic wages," Jerry Schiff, the International Monetary Fund's mission chief to Japan, told Reuters on Tuesday.
Industrial output rose 1.5 percent in September, less than a median market forecast of a 1.8 percent increase but bouncing back from a 0.9 percent decline in August, data from the Ministry of Economy, Trade and Industry showed on Wednesday.
The output index rose to 98.5, the highest since May last year, prompting the government to raise its assessment on output to say it is "picking up."
Automakers ramped up production on brisk demand at home and in the United States, and computer makers enjoyed an increase in orders from Japanese financial institutions benefitting from rising trade volume in equities, the ministry said.
"The data showed a clear pick-up in factory output led by firm domestic demand," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.
But some of the strength will be short-lived, reflecting a burst of spending before the government raises the national sales tax to 8 percent in April from 5 percent now, he said.
Manufacturers surveyed by the ministry expect output to rise 4.7 percent in October but slip 1.2 percent in November, as slowing overseas demand clouds the outlook.
The output data will be among factors BOJ policymakers will scrutinise at a policy review on Thursday, when they are expected to slightly revise up their economic growth forecast for the next fiscal year.
WAGE PICK-UP EYED?
Japan's economy expanded for a third straight quarter in April-June, outpacing its Group of Seven counterparts, as the feel-good mood generated by Abe's policies bolstered business sentiment and personal consumption.
But the traditional engine of export growth fell well short of expectations in September on slowing demand in Asia.
Anoop Singh, the IMF's top official for Asia, was upbeat on the outlook for the region, saying weaker currencies and strength in advanced economies may counteract tighter global funding conditions as the U.S. Federal Reserve eyes tapering its massive stimulus programme.
"We do see that the U.S. economy is showing signs of a significant recovery. While this will drive further tapering, our sense is that Japan and Asia, on a net basis, should gain ... from high U.S. growth," he said.
Manufacturers, having benefitted from a weaker yen and strong household spending, are now under pressure from Abe to boost wages and create a "virtuous cycle" of growth to beat deflation.
After years of hoarding cash instead of spending on plants and equipment or raising salaries, some firms such as second-tier automaker Mitsubishi Motors Corp (7211.T), appear willing to cooperate.
"We want to work to better the lives of our employees," the automaker's president Osamu Masuko said on Tuesday. "We'll consider a raise in base pay with a positive view."
But it remains uncertain whether smaller companies will follow suit given wariness about the durability of Japan's recovery and the weakness in overseas demand. A recent Reuters corporate survey found that only 5 percent of respondents would use the additional savings to raise wages.
(Additional reporting by Tetsushi Kajimoto, Yoko Kubota and Maki Shiraki; Editing by William Mallard and John Mair)