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UPDATE 1-Japan business mood hits decade-high - BOJ tankan

(Adds detail, background)

* Big manufacturers' sentiment index plus 22 vs f'cast +18

* Service-sector sentiment index plus 23 vs f'cast +23

* Big firms expect business conditions to worsen

* Big firms' capex seen +7.7 pct in FY2017 vs f'cast +8.3

TOKYO, Oct 2 (Reuters) - Japan's big manufacturers were the most confident about the business outlook in a decade in the last quarter, a closely watched central bank survey showed on Monday, a sign the country's economic recovery may be gathering steam thanks to robust global demand.

The upbeat data supports the hopes of Bank of Japan policymakers that a sustained economic recovery will boost wages and household spending, helping to accelerate inflation to its ambitious 2 percent target.

The findings could also help premier Shinzo Abe as he tries to convince voters in an Oct. 22 election that his "Abenomics" stimulus policies have improved their livelihoods, analysts say.

The BOJ's quarterly "tankan" survey showed the headline index for big manufacturers' sentiment stood at plus 22 in September, handily exceeding a median market forecast of plus 18 to mark the highest level since September 2007.

It was higher than plus 17 seen in the previous survey in June, posting a fourth straight quarter of improvement, the tankan survey showed on Monday.

Big non-manufacturers' sentiment index stood at plus 23, unchanged from June and matching a median market forecast, the survey showed.

Big firms expect to increase capital expenditure by 7.7 percent in the current fiscal year ending in March 2018, compared with a median market forecast for a 8.3 percent gain.

Both big manufacturers and non-manufacturers expect business conditions to deteriorate in the next three months, according to the survey.

The survey will be among data the BOJ board will scrutinise when it issues fresh long-term economic and price forecasts at a rate review on Oct. 30-31.

Japan's economy expanded at an annualised 2.5 percent in the second quarter on robust consumer and corporate spending, heightening hopes of a sustained recovery.

While a slowdown from exceptionally high second-quarter growth, the economy is likely to have expanded 1.1 percent in the July-September period, according to a Reuters poll.

But price and wage growth remain weak with firms still wary of passing more of their profits to employees, forcing the BOJ to push back the timing for reaching its price target six times since deploying a massive stimulus programme in 2013.

The BOJ now expects inflation to hit 2 percent in the fiscal year ending in March 2020, arguing that a tightening job market and solid economic growth will gradually push up prices.

The tankan's sentiment indexes are derived by subtracting the number of respondents who say conditions are poor from those who say they are good. A positive reading means optimists outnumber pessimists. (Reporting by Leika Kihara; Editing by Eric Meijer)