Tax hike still keeping Japan households from spending - BOJ survey

TOKYO (Reuters) - Nearly 60 percent of Japanese households cut spending after last year's sales tax hike and most continue to withhold consumption, a Bank of Japan survey showed, highlighting the challenges of reviving an economy struggling to edge out of recession.

The survey also showed that while households saw economic conditions improve and income rise, they remained hesitant of boosting spending, underscoring the tricky balance the BOJ faces in trying to accelerate inflation without cooling consumption.

Japan slipped into recession after the government raised the sales tax to 8 percent from 5 percent in April last year, forcing Prime Minister Shinzo Abe to delay by 18 months a second tax hike initially scheduled in October 2015.

While the economy emerged from recession thanks to a rebound in exports and factory output, private consumption has been weak due to the higher levy and the rising cost of living as the weak yen drove up import costs.

In a sign of hope, the diffusion index measuring how households felt about the current state of the economy improved 8.3 points from December to minus 24.6 in March, the BOJ's quarterly survey on people's livelihood showed on Thursday.

An index gauging households' income conditions also improved 3.5 points to minus 28.1, the best level since comparable data became available in 2006, a sign companies are raising wages to attract workers in a tightening job market.

But an index measuring household expenditure worsened with 20.3 percent of respondents saying they cut spending from a year ago, up from 18.8 percent in December. The percentage of households who said they increased spending fell to 43.7 percent from 47.1 percent three months ago.

In the first such survey since last year's sales tax hike, the BOJ also asked respondents how the tax increase affected their spending patterns.

Of the total, 59.8 percent said they cut spending after the tax hike, citing rising prices of goods and services. When asked how long they slashed spending, 75.3 percent said they continue to do so up now, the survey showed.

Despite the BOJ's aggressive monetary easing to hit its 2 percent inflation target, households' price expectations barely changed from three months ago, according to the survey.

Of the total, 81.6 percent said they expect prices to rise a year from now, compared with 80.8 percent in December.

The survey, conducted between Feb. 6 and March 5, covered 4,000 households of which 2,223 gave valid replies.

(Reporting by Leika Kihara; Editing by Simon Cameron-Moore)