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TOKYO (Reuters) - Japan's household spending surged in March at the fastest pace in nine years in a sign that Prime Minister Shinzo Abe's bold efforts to end two decades of stagnation are lifting consumer confidence and setting the stage for an economic revival.
A recent run of data has provided encouraging early hope that Abe's push for aggressive fiscal and monetary policies to get the world's third-largest economy motoring is having the desired effect.
Separate data on Tuesday also showed the jobless rate fell to the lowest in more than four years, providing another piece of evidence that domestic demand could play a critical role in underwriting economic growth in coming months.
While Japan's industrial production rose less than expected in March due to tepid demand overseas, economists are confident that exports and factory output will eventually pick up due to a weaker yen.
On the whole, the figures suggest that expectations for Abe's combination of fiscal spending, monetary stimulus and structural reforms, known as "Abenomics," are having a positive impact on the household sector although the corporate sector is lagging behind.
"I expect the first quarter gross domestic product growth to exceed an annualized 2 percent, and if the corporate sector catches up with households, the pace of growth could accelerate," said Yoshiki Shinke, senior economist, Dai-Ichi Life Research Institute.
"Recovery in exports has been slow and so has industrial output, but as a weak yen is expected to impact shipments from now on, exports and factory output will pick up in coming months."
Abe's policy mix has so far driven the yen to a four-year low against the dollar and sparked a 50 percent rally in Japanese share prices from November, which has helped buoy consumer sentiment.
Confidence in Japan received another boost on April 4 when the Bank of Japan launched its radical monetary expansion campaign, promising to inject about $1.4 trillion into the economy in less than two years.
Household spending soared 5.2 percent in March from a year earlier in price-adjusted real terms, Ministry of Internal Affairs and Communications showed on Tuesday, as some individual investors cashed in on gains in stocks to increase spending on cars and home repairs.
That blew past the median estimate for a 1.8 percent annual increase and was the fastest gain since a 5.3 percent rise in the year to February 2004.
Such a big increase in spending is unlikely to be sustainable, and there are worries that wages have been slow to improve.
Economists have also warned in the past that the sample size for household spending is small and easily swayed by big ticket purchases.
Still, they expect consumer spending will continue to expand at a more reasonable pace as individual investors cash in on stock gains.
The seasonally adjusted unemployment rate fell to 4.1 percent in March, the lowest since 4.0 percent in November 2008, figures from the Internal Affairs ministry showed. That compared with economists' median forecast of 4.3 percent,
The jobs-to-applicants ratio was at 0.86, which matched the level seen in August 2008, separate data from the labor ministry showed.
One worrying sign was the slow uptick in industrial production, which rose a less-than-expected 0.2 percent in March, according to data from the Ministry of Economy, Trade and Industry.
Manufacturers surveyed by the ministry expect output to rise 0.8 percent in April and fall 0.3 percent in May, the data showed.
Japanese retail sales fell 0.3 percent in March from a year earlier, according to a separate release from the Ministry of Economy, Trade and Industry.
That was counter to the median estimate for a 0.6 percent annual increase, but economists say the data may not accurately reflect consumption, because it does not include spending on services.
Overall, policymakers will be encouraged by the improving mood among consumers. Data earlier this month showed Japanese consumer confidence rose in March to the highest level in almost six years, an important signal as Abe's policies rely heavily on expectations for future growth and prices.
Household spending is a crucial leg in reigniting growth, and in this respect Tuesday's data should come as a relief to BOJ Governor Haruhiko Kuroda as he aims to get the economy to generate 2 percent inflation in roughly two years.
Kuroda wants to raise inflation expectations in order to boost consumer spending and encourage capital consumption, leading to a virtuous circle that pushes consumer prices higher.
Editing by Shri Navaratnam