TOKYO (REUTERS) - Japan's core machinery orders unexpectedly rose 3.8 per cent in April from the previous month, the Cabinet Office said on Wednesday, in a sign that capital expenditure is gaining strength.

The rise in core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, compared with the median estimate of a 2.0 per cent decrease in a Reuters poll of economists.

That followed a 2.9 per cent increase in the previous month.

Compared with a year earlier, core orders rose 3.0 per cent, versus the median estimate for a 1.3 per cent annual decline.

The Cabinet Office raised its assessment of machinery orders, saying they are recovering.

Improving business confidence and record corporate profits suggest that companies have the capacity to expand investment as long as domestic demand holds steady, which is essential to driving a virtuous cycle of more robust economic growth.

"Capital expenditure is headed in the right direction, reflecting an improvement in domestic demand," said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities. "The broad economy should be able to maintain stable growth, which will be a relief for policymakers."

Orders from manufacturers rose 10.5 per cent in April from the previous month, the fastest increase in nine months due to gains from auto and electronics manufacturers, Cabinet Office data showed on Wednesday.

Orders from the services sector fell 0.6 per cent versus a 4.7 per cent increase in the previous month due to lower spending on communications equipment Compared with a year earlier, core orders rose 3.0 per cent, versus the median estimate for a 1.3 per cent annual decline.

The Cabinet Office raised its assessment of machinery orders, saying they are recovering.

The data comes after first-quarter gross domestic product growth was revised up due to robust gains in capital expenditure.

Japanese manufacturers' sentiment improved in May and the service-sector's mood rose to its highest level in a year due to healthy consumer spending, the Reuters tankan survey showed.

Positive economic momentum could benefit the Bank of Japan, which is trying to guide inflation to its 2 percent price target in the first half of fiscal 2016 with its massive quantitative easing programme.