* Factory activity in Q3 higher than previous quarter-PMI

* Early signs manufacturing is improving

* Economists still in doubt on wages, consumer spending

* Q3 data to determine if second sales tax hike goes ahead (Adds details on economic policy)

By Stanley White

TOKYO, Sept 24 (Reuters) - Japan's manufacturing activity picked up in the third quarter, a survey showed, but economists say they need more information on wages and consumer spending to determine whether the government should raise the sales tax again next year.

An improving corporate sector is certainly welcome news for Japanese Prime Minister Shinzo Abe after the economy contracted sharply in the second quarter following the first of two increases in the sales tax.

But the government, which is monitoring third-quarter economic data to decide whether to raise the sales tax again, is likely to remain cautious for fear that consumer spending may not fully recover. Abe is to make a final decision by the end of the year.

"Conditions for Japan's manufacturers are improving, and this is in line with an improvement overseas," said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

"However, Abe's policies rely more on households and the services sector."

The Markit/JMMA flash Japan Manufacturing Purchasing Managers Index (PMI) fell to a seasonally adjusted 51.7 in September from a final reading of 52.2 in August, but remained above the 50 threshold that separates expansion from contraction for a fourth straight month.

From July to September, the manufacturing PMI averaged 51.5, which is higher than the April-June average of 50.3 and shows that manufacturing is recovering, Miyazaki said.

The quarterly figures could ease fears that manufacturers would scale back production as stocks of unsold goods piled up after the tax hike.

In another encouraging sign, the output component of the flash PMI index rose to 53.4 from a final 52.9 in August to reach the highest level in six months.

Signs of rising factory output could help the economy recover from the shock of the April sales tax hike to 8 percent from 5 percent.

The increase dampened consumer spending more than many economists expected, triggering a 7.1 percent annualised contraction in the second quarter, and has taken some steam out of an expected third quarter rebound.

The government will analyse data for July-September to decide whether to proceed with a second sales tax hike to 10 percent scheduled for late next year.

The tax increases are needed to pay for rising welfare spending, but some politicians worry they will do too much damage to the economy.