* Big firms' pay raises bigger than expected
* Companies responded to government pressure
* Base pay won't offset tax hike, but some bonuses generous
* Higher base pay needed for sustainable economic recovery (Adds details, quotes throughout)
By Tetsushi Kajimoto and Yoko Kubota
TOKYO, March 12 Big Japanese companies such as Toyota Motor Corp offered the most generous pay raises in years on Wednesday, a victory for the government's efforts to defeat deflation, but workers will still struggle to offset a looming sales tax increase.
Under heavy pressure from Prime Minister Shinzo Abe to help kick-start a durable recovery with hefty pay increases, major firms like Toyota, Hitachi Ltd and Panasonic Corp responded more generously than some experts had expected to union wage demands.
Still, this first batch of companies in Japan's annual "spring labour offensive" represent the bluest of the blue chips; the vast majority of Japanese employees work for smaller companies that haven't benefited as much from "Abenomics."
Japanese companies are enjoying bumper profits thanks to Abe's massive stimulus policies and the resulting weak yen. But this year the companies had to take on not only their unions but also the ostensibly pro-business Abe administration.
Economy Minister Akira Amari, who on Tuesday had threatened unspecified action against "uncooperative" companies, said on Wednesday that "the management side responded above expectations" and that their pay offers would become "a big driving force for escaping deflation and reviving the economy."
Increases in base pay and seniority increases amount to 2.2-2.3 percent for major firms, while small and mid-size companies are offering over 2 percent, reckoned Hisashi Yamada, chief economist at the Japan Research Institute.
That won't cover the 3 percentage-point increase in the sales tax, taking effect on April 1, but some big firms were generous with bonuses, putting workers comfortably ahead, at least for now.
As recently as February, a Reuters survey of big companies found more than 80 percent were not planning to raise base pay and most would not offer enough total compensation increases to offset the sales tax hike.
Government spending and the Bank of Japan's enormous asset purchases have made a start in dragging the world's third-biggest economy out of 15 years of deflation and uncertain growth, but a durable recovery needs a cycle of rising profits, wages and prices.
Toyota, a benchmark on pay raises, will give its Japan-based workers their biggest raise in monthly pay in 21 years in the business year starting in April.
Base pay, a critical component that is hard for companies to reverse during downturns, will rise by 2,700 yen ($26.20) a month, the first increase in six years but less than its union's demand for a 4,000 yen increase.
Including bonuses, total compensation will rise 7.6 percent.
The world's biggest carmaker clearly felt it had to fall in line.
"There is a certain role that (our) labour and management are expected to fulfil in order for the Japanese economy to step out of deflation and attain a virtuous cycle," Toyota Senior Managing Officer Naoki Miyazaki told reporters at the auto maker's headquarters in Toyota City, central Japan.
"We feel that we have fulfilled our role and we hope that the salary hike trend would spread to various areas."
But while Nissan Motor Co, Japan's No.2 carmaker by global sales volume, met workers' demands for a 3,500 yen raise in monthly base pay and a hefty bonus, small-car specialist Daihatsu Motor Co offered just 800 yen, citing increased competition in Japan and a slowdown in Indonesia.
Many Japanese firms remain wary of raising base pay due to doubts about over the recovery's sustainability and concern about higher fixed personnel costs, which are hard to shed during downturns.
Honda Motor Co. raised base pay 2,200 yen, below the union's demand of 3,500 yen, saying business was improving but "we are still midway through structural reform and making our domestic operations more independent."
Among electronics makers, Hitachi, the largest manufacturing employer in Japan with more than 200,000 workers, and Panasonic said they would boost their monthly base wage by 2,000 yen, half of what their unions requested.
For the thousands of companies below the top tier - which employ the vast majority of Japanese workers - compensation is likely to be less generous.
For example, when big car makers such as Toyota raise base pay for their workers, they can squeeze suppliers to cut costs, putting downward pressure on their wages and diluting the economic lift of the wage gains at the top. ($1 = 103.2350 Japanese Yen) (Additional reporting by Yoshiyuki Osada in Toyota City, and Izumi Nakagawa, Yuko Yoshikawa and Yuka Obayashi in Tokyo; Editing by William Mallard & Kim Coghill)