TOKYO (Reuters) - Japan's leading gauge of capital spending rose for a third straight month in August, in a sign firms are investing their profits in plants and equipment that could bolster growth in the world's third-largest economy.

The 4.7 per cent monthly gain in core machinery orders in August will help ease concerns the economy is losing traction even as the Bank of Japan maintains ultra-loose monetary policy and the government stands ready to deploy fresh fiscal stimulus.

The data followed a shocking slump in August factory output and other soft indicators including exports and household spending, complicating the government's decision by the year-end on whether to proceed with a second sales tax hike next year.

The Japanese economy shrank an annualised 7.1 per cent in the second quarter, the biggest contraction since the 2008-09 global financial crisis, as an April sales tax hike dealt a heavy blow to consumer demand.

Prime Minister Shinzo Abe is due to make a decision on the sales tax increase in December, looking at economic indicators in July-September for clues on whether the economy is strong enough to withstand the impact from the higher levy.

The government plans to increase the sales tax rate to 10 per cent in October 2015, after having raised it to 8 percent from 5 per cent in April.

Cabinet Office data showed core machinery orders, a highly volatile data series regarded as a key gauge of capital spending in six to nine months, rose 4.7 per cent in August from the prior month, much faster than a 0.9 per cent gain expected by analysts. "Machinery orders show a moderate pick-up move," the Cabinet Office said, upgrading their assessment. Previously, machinery orders were described as seesawing.

The rise followed monthly gains of 3.5 per cent in July and 8.8 percent in June, after a record 19.5 per cent drop in May.