A private gauge of Japan's manufacturing sector has shown that factory activity in the world's third-largest economy expanded at its fastest pace in 12 months in December.

The manufacturing purchasing managers' index (PMI), compiled by Nikkei and IHS Markit, rose to a seasonally-adjusted 52.4 from 51.3 in November, higher than a preliminary reading of 51.9. A score above 50 indicates expansion in the sector.

The output and new orders sub-indices both saw marked growth in December, while the rate of job creation rose to its highest level since early 2014.

Output at Japanese manufacturers has risen for five straight months, with survey respondents crediting new product launches and increased new orders for the growth in December.

New orders increased for the fourth straight month amid greater trade volumes with China, Europe and the US.

"The Japanese manufacturing sector ended 2016 on a good footing, with both production and new orders expanding at the sharpest rates seen over the year," said Amy Brownbill, economist at IHS Markit.

"The stronger PMI data are in line with the IHS forecasts for [industrial production] growth in November and December, with the annual rate of expansion set to hit 3.8% by the end of the year.

"Manufacturers were also more optimistic towards taking on additional workers, with job creation ticking up to a 32-month high."

Input costs continued to rise in December as the weaker yen pushed up the prices of oil and metals.

Japan's economy expanded at an annualised rate of 2.2% between July and September, the third consecutive quarter of growth.

In December, the government said it expected the economy to grow 1.5% in the coming financial year from an estimated growth of 1.3% in the year ending March 2017.

The Bank of Japan upgraded its assessment of the economy last month, leading to speculation that the central bank could raise interest rates in the near future.