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UPDATE 2-Japan household spending hits 4-decade high; wages key to outlook

* March household spending up 7.2 pct yr/yr

Jobless rate at 3.6 pct, matches 7-yr low

* Job-to-applicant ratio continues to improve

(Adds details, quote from govt spokesman)

By Leika Kihara

TOKYO, May 2 (Reuters) - Japanese household spending soared at the fastest annual pace in four decades in March as consumers rushed to beat a sales tax hike, with early signs backing the central bank's conviction the economy will weather an expected fall in consumption over coming months.

The Bank of Japan has repeatedly said in recent weeks that the world's third-biggest economy in not in need of fresh near-term stimulus to overcome the pain of the April 1 tax increase.

That view gained further currency with separate data on Friday showing the jobless rate held steady at a nearly seven-year low and the availability of jobs continued to improve.

"Household spending was stronger than expected in March, pointing to considerably high growth in private consumption in the first quarter on pent-up demand ahead of the sales tax hike," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"The pullback in demand after the tax hike may be within expectation so far, as the BOJ and the government argue. But we need to wait to see how consumption fares in May and June before making any judgment."

Household spending rose 7.2 percent in March from a year earlier, data showed on Friday, far exceeding a median market forecast for a 1.0 percent increase, as demand boomed ahead of the sales tax hike to 8 percent from 5 percent in April.

It was the biggest annual increase since 1975 and exceeded a 5.8 percent rise in March 1997, when Japan previously raised the sales tax to 5 percent from 3 percent. The rise in 1997 was followed by a 1 percent drop in April.

Spending on refrigerators and vacuum cleaners quadrupled, while consumers also rushed to buy daily necessities like toilet paper and shampoo, the data showed, a sign the pent-up demand ahead of the tax hike was broad-based.

Household spending is likely to have fallen in reaction to the surge in March, though policymakers hope expectations of improving job markets and higher wages will take the sting out of the tax hike.

Indeed, the jobless rate stood at 3.6 percent in March, matching a median market forecast and steady from the seven-year low hit in February.

Job availability also continued to improve with separate data showing the jobs-to-applicants ratio rose to 1.07 from 1.05 in February, above a median estimate for 1.06 and matching a high last seen in 2007.

"Job conditions are improving steadily," top government spokesman Yoshihide Suga told a news conference, adding that the decline in spending after the tax hike has been within the government's expectations so far.

WAGE GROWTH KEY

The increase in the sales tax has sparked worries that consumers will tighten their wallets, threatening the economic recovery Prime Minister Shinzo Abe has engineered with aggressive monetary and fiscal stimulus.

But anecdotal evidence has shown the slump in spending in April has been moderate, underscoring the Bank of Japan's view that the economy can withstand the pain from the tax hike without additional monetary stimulus.

The key is whether the low jobless rate, which BOJ Governor Haruhiko Kuroda has described as nearing full employment, will translate into higher wages to spur a positive cycle of spending, business investment and prices, analysts say.

Total wages rose 0.7 percent in March from a year earlier, the first increase in three months, though regular pay continued to fall as companies made up for labour shortages with overtime pay or temporary workers.

If wage growth remains slow, big-ticket items may bear the brunt of any downturn in consumption. Automobile sales in April dropped 5.5 percent from a year earlier to hit the lowest level since December 2012, as the sales tax increased sapped demand, data showed on Thursday. But the drop was smaller than a 15 percent fall in sales when Japan last raised the tax in 1997.

Overall, Friday's data supports the BOJ's view that it can hold off on expanding monetary stimulus for now and take more time to scrutinise the tax-hike impact.

As widely expected, the BOJ earlier this week maintained its pledge to boost base money, its key policy gauge, at an annual pace of 60 trillion to 70 trillion yen ($587-$684 billion).

Crucially, the BOJ also projected for the first time that inflation will exceed 2 percent roughly two years from now, underscoring its conviction that a sustained end to deflation is on the horizon.

Japan's economy has slowed since the second half of last year as the effects of Tokyo's aggressive stimulus policies faded, though economists expect the recovery to pick up pace later this year. ($1 = 102.2700 Japanese Yen)

(Additional reporting by Tetsushi Kajimoto; Editing by Edmund Klamann & Shri Navaratnam)