Photo/Illutration The Tokyo metropolitan government building and other high-rise buildings in the capital’s Shinjuku district (Asahi Shimbun file photo)

Japan's economy expanded by a faster-than-expected annualized 3.1% in April-June, rebounding from the previous quarter thanks to a strong pick up in consumption and backing the case for another near-term interest rate hike.

The Bank of Japan had forecast that a solid economic recovery will help inflation sustainably hit its 2% target, and justify raising interest rates further.

The increase in gross domestic product (GDP) compared with a median market forecast for a 2.1% gain, and followed an upwardly revised 2.3% slump in the first quarter, government data showed on Thursday. The reading translates into a quarterly rise of 0.8%, beating a 0.5% increase expected by economists in the Reuters' poll. "The results are simply positive overall, with signs for a pick-up in private consumption backed by real wage growth," said Kazutaka Maeda, an economist at Meiji Yasuda Research Institute.

"It supports the BOJ's view and bodes well with further rate hikes, although the central bank would remain cautious as the last rate increase had caused a sharp spike in the yen."

Private consumption, which accounts for more than half of the economic output, rose 1.0%, compared with forecast for a 0.5% increase and the first gain in five quarters.

Private consumption has been a soft spot in the economy as households struggle with rising living costs, blamed in part on higher import prices due to the weak yen.

Public discontent over rising living costs was one of the factors that prompted Japan's Prime Minister Fumio Kishida to announce he would resign next month.

"Basically, we expect consumption to continue to recover," said Kengo Tanahashi, economist at Nomura Securities.

"In addition to the fixed-rate tax reductions starting in June and subsidies on electricity and gas bills starting in August of this summer, the spring wage talks were strong again this year, and we believe that the increase in income will boost consumption."

Capital spending, a key driver of private demand-led growth, rose 0.9% in the second quarter, versus an increase of 0.9% seen by economists in Reuters' poll.

External demand, or exports minus imports, knocked 0.1 point off growth, the data showed.

The Bank of Japan (BOJ) raised interest rates last month and detailed a plan to taper its huge bond buying in another step toward phasing out its massive monetary stimulus.

The first rise in consumption in more than a year "should encourage the Bank of Japan to press ahead with another rate hike later this year," said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

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