(Updates with quotes, background)
By Natsuko Waki and William James
LONDON, May 1 (Reuters) - Japan's consumer spending has not slowed as much as feared after a consumption tax hike in April, but such a risk warranted caution, Prime Minister Shinzo Abe said on Thursday.
Speaking to business leaders in London, Abe also said wages and employment must improve visibly to overcome deflation.
"While of course we still need to exercise caution regarding the risk of Japan's increased consumption tax rate dampening consumption, people are taking an optimistic view that consumption has not been diminished to the extent we had feared," he said.
"To overcome deflation, it is absolutely necessary for wages and employment to move in a visible way in a positive direction."
Abe, who has begun to reverse years of sub-par growth with expansionary fiscal and monetary policies, has also said his measures are leading the world's third-largest economy out of deflation.
Since coming back into office in 2012, Shinzo Abe has engineered the economic recovery with aggressive monetary and fiscal stimulus, known as Abenomics.
Earlier this week, the Bank of Japan 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 without additional stimulus.
Repeatedly stating that Abenomics is moving forward, Abe said he was determined to push through labour market reforms in order to grow the economy despite a declining population.
"In order to grow, we must raise productivity ... We need to reform labour regulation in order to make working conditions more flexible," Abe said, in an answer to a question by Bank of England Deputy Governor Andrew Bailey.
"Over the past year we've realised how difficult it has been to do so. But we cannot grow without labour reforms. We are determined to make that happen."
Abe's 10-day visit to Europe will also take in Portugal, Spain, France and Brussels, institutions such as NATO and the Organisation for Economic Cooperation and Development (OECD), and meetings with European business leaders. (Reporting by Natsuko Waki and William James; Editing by Ken Wills)