By Tetsushi Kajimoto and Stanley White
TOKYO (Reuters) - Japan's industrial output slid 0.7 percent in August after a hefty gain the previous month, but company production forecasts indicate that factory output and the broader economy are still on track to steady recovery.
A separate survey showed manufacturing activity expanded in September at the fastest pace since the March 2011 earthquake, highlighting the strength of an economy backed by rising exports and firm domestic demand.
Other data out on Monday also signalled consumer spending gaining momentum. Retail sales rose 1.1 percent in August from a year earlier and housing starts rose 8.8 percent, up for 12 months in a row, although housing starts were below the 12.7 percent gain seen in a Reuters poll.
The new data is likely to support the case for Prime Minister Shinzo Abe to approve a planned sales tax hike for next April, the biggest effort by Japan in decades to fix its tattered public finances.
"Factory output is a bit weak now, but will return to levels seen before the March 2011 earthquake around October. Companies are starting to produce more and aren't too worried about uncertainties in the overseas economy," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.
Abe - whose reflationary policies have boosted share prices, weakened the yen and bolstered sentiment in Japan - is expected to make the sales tax decision after confirming readings in a key Bank of Japan business sentiment survey due at 8:50 a.m. Tuesday (2350 GMT Monday).
The planned two-staged sales tax hike - from the current 5 percent to 8 percent next April and to 10 percent in October 2015 - helps underpin private consumption as it prompts a last-minute buying rush of big-ticket items such as houses and cars before the increases are implemented.
The August drop in industrial output compared with a 0.4 percent decline projected in a Reuters poll, and followed a 3.4 percent gain in the previous month, data from the Ministry of Economy, Trade and Industry (METI) showed.
Manufacturers surveyed by the ministry expect output to rise 5.2 percent in September and increase 2.5 percent in October, the data showed.
The Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI) rose to a seasonally adjusted 52.5 in September from 52.2 in the previous month, exceeding for a seventh month the 50 threshold that separates contraction from expansion.
The survey showed that manufacturing activity expanded at the fastest since February 2011, one month before the natural disaster struck the country's northeast coast.
Japan's economy grew an annualised 3.8 percent in the second quarter, driven in large part by strong consumer spending. The central bank upgraded its assessment of the economy earlier this month to say it was recovering moderately.
The BOJ's quarterly "tankan" corporate survey will likely show the headline index for big manufacturers' sentiment improved three points from the previous quarter to plus 7, according to a Reuters poll of 22 economists.
(Writing by Leika Kihara; Editing by Eric Meijer)