UPDATE 1-Taste for little luxuries suggest Japan's tax rise hangover fading
* Champagne, fashion, fast food point to strong consumption
* Conventional indicators slow to capture state of economy
* Spending already recovering from April sales tax hike (Adds link for graphic, updates UTokyo index in 26th paragraph)
By Stanley White and Izumi Nakagawa
TOKYO, June 13 (Reuters) - Bartender Yoshiro Tsuneoka smiled with satisfaction between popping open bottles of champagne. It was midweek, 8 pm, and business was good at the tiny bar in downtown Tokyo.
Watching a bevy of young professionals quaffing sparkling wine, there was little sign that an increase in Japan's sales tax in April caused anything more than a hiccup in the economy.
"Sales have been doing well for a while now and we've noticed no change after the tax increase," Tsuneoka said above the sound of clinking glasses. "We get a broad range of customers, and their spending hasn't changed."
Japan needs people spending with confidence if a radical strategy adopted by Prime Minister Shinzo Abe is to succeed in breaking the economy free of two decades of deflation and sub-par growth.
Government data covering the period after the tax was increased to 8 percent from 5 percent at the start of April has begun to trickle in. Household spending and retail sales in April dropped the most in three years.
But policymakers need to wait until July or so for a fuller picture of the tax impact.
For the time being, champagne sales and other untraditional measures may offer a good early read on consumption, which makes up 60 percent of the economy.
A sharper downturn in spending could have big consequences, potentially prompting the Bank of Japan to increase its massive monetary stimulus and complicating Abe's attempts to rein in the developed world's biggest debt burden.
Politicians painfully remember the deep recession that followed the last tax hike in 1997 - although that downturn coincided with the Asian financial crisis.
If the economy re-gathers pace after absorbing the initial impact of the sales tax, it would allow Abe to focus on reforms to boost Japan's long-term growth, and make it easier for him to decide later this year whether to go ahead with a planned second increase in the tax.
Bank of Japan mandarins are known to keep tabs on informal indicators, like the price of a budget haircut or "gyudon" bowls of stewed beef on rice. How easily businesses can pass higher costs on to consumers is fundamental to the central bank's drive to generate 2 percent inflation.
TOUCH OF INDULGENCE
Whereas people with a taste for champagne might not be representative of the average Japanese household, the IT startup employees and web designers drinking at Tsuneoka's bar are not especially wealthy either.
But they have a choice what to do with their money, and clearly prefer to keep on spending for the temporary pleasure given by the imported bubbly.
Paying less than 1,000 yen ($9.80) a glass, they are only drinking a mid-tier label, not the fancier stuff costing 20 to 70 percent more.
Japan's imports of champagne and other sparkling wine climbed 18.8 percent by volume in April from a year earlier, barely slowing from March's 21.1 percent rise and extending a series of increases that began late last year.
This is in line with brisk sales in what advertisers call the "petite luxury" market, where slapping a "premium" label on a product can help it fetch a higher price.
Take the example, of rice balls, or onigiri, sold at Seven-Eleven convenience stores in greater Tokyo.
In the first two weeks of May, these stores sold more than 2 million "Gold Onigiri" rice balls, about 20 percent more than expected, even though they, at 200 yen each, the cost twice as much as the chain's most basic onigiri, said parent company Seven & i Holdings.
The optimistic mood is also evident in the way people dress, according to sales staff at stores in Tokyo's Ginza shopping district. Women are going for brightly coloured lipstick and clothes, whereas customers tend to choose drab colours when times are tougher. Even Japan's typically, dowdy middle-aged men are buying brighter colours for the summer, sales people say.
"Companies are targeting the 40 percent of the population that earns 8 million yen or more per year," said Yoshiyuki Sodekawa, research director at Dentsu Innovation Institute, which studies market trends for advertising giant Dentsu.
This demographic, which compares with Japan's median wage-earner income of 4.4 million yen ($43,000), "accounts for much more than 40 percent of total spending and is leading the recovery in consumption now."
Critics of "Abenomics" say the premier's policies have largely ignored low-income "working poor" and that this could shackle consumer spending.
But, in a sign that more downmarket consumers remain willing to spend, Fast Retailing Co Ltd said on Tuesday it will raise prices by around 5 percent at its domestic Uniqlo casual clothing stores as sales rose for two months after the tax hike.
More broadly, department store sales recovered in May, and sales of home electronics rebounded to where they were last year, surveys by Dentsu Innovation Institute show.
For supermarkets, a near real-time measure shows prices steady after stripping out the tax hike, a sign that spending there too is firm.
The UTokyo Daily Index, a gauge of prices at 300 supermarkets nationwide compiled by Tokyo University professors, has fluctuated modestly above and below year-earlier levels for the past two months and was up 0.15 percent as of Tuesday.
Back in April, the Reuters Breakingviews Abenomics index, a compendium of Japanese economic data, inched down to 85.97 from 96 in March as consumption wobbled, though wages, lending and housing starts held up.
Consumer sentiment is quickly recovering from the tax hike, according to a "lifestyle index" from Hakuhodo Institute of Life & Living, an arm of Japan's second-biggest ad agency.
The index, measuring the willingness of consumers in Tokyo, Nagoya and Osaka to spend, fell to 43.7 in April from 53.8 in March before bouncing to 44.3 in May and 47.2 in June.
"People are saying they want to spend money on services, like going to the beauty salon or going out to eat," said Akemi Natsuyama, the institute's R&D director. "They also want to buy computers, mobile phones and cameras."
Not all consumption measures, however, point upward. Consider the Tuna-Mackerel Index, a gauge crafted by economist Kenta Ishizu at Mizuho Securities to act as a leading indicator of consumer demand.
The idea is that when consumers are feeling flush, they will pay up for the more expensive "maguro" tuna of sushi fame, and when they are hard up, they will opt for the lowlier "aji".
Although the economy has gathered strength over the past year and a half thanks to Abenomics, the index has trended lower since mid-2013 and recently went into negative territory, indicating a preference for the cheaper fish.
The problem, Ishizu says, is that inflation is now outpacing wages, despite a recent round of pay raises and bonuses.
Core consumer prices rose 3.2 percent in April from a year earlier, the fastest in 23 years and far outstripping a 0.9 percent rise in total cash earnings.
"Consumer spending cannot be an engine of economic growth unless people expect their wages to rise next year," Ishizu said. ($1 = 102.4750 yen)
(Additional reporting by Chang-Ran Kim; Editing by Simon Cameron-Moore)