* Household spending falls in April, recovery may be slow
* Govt downgrades industrial production after decline
* Inflation excluding sales tax hike rising
By Tetsushi Kajimoto and Stanley White
TOKYO, May 30 (Reuters) - Japan’s household spending in April fell at the fastest rate in three years in a sign that consumption could be slow to recover from an increase in the nationwide sales tax, raising questions over the pace of economic recovery.
Industrial production fell more than expected in April as companies cut output to avoid a pile up in inventories in the lull after the sales tax hike took effect.
BOJ officials have repeatedly said they are confident spending will quickly recover as the labour market remains tight, but the bigger-than-expected spending drop in April and a slowdown in factory activity could raise the stakes for monetary policy.
“Spending will recover from May, but sales of durable goods look weak and this could be a drag on overall spending,” said Hidenobu Tokuda, senior economist at Mizuho Research Institute.
“The government can afford to let the spending in its stimulus package run its course. The BOJ doesn’t need to move now, but it needs to keep an eye on the situation.”
Japanese household spending fell 4.6 percent in April from a year ago, more than the median market forecast for a 3.2 percent annual decline. That marked the fastest annual decline since March 2011, when an exceptionally powerful earthquake triggered a nuclear disaster.
Compared to the previous month, spending tumbled by a record 13.3 percent in April, more than the 13.0 percent decline expected by economists.
Government data published with the new figures show that household spending fell further after the April 1 sales tax hike than it did after the 3 percent sales tax in was imposed in 1989, and when it raised the tax to 5 percent in 1997.
In both 1989 and 1997 spending remained flat after the tax was imposed and then increased.
Nationwide consumer prices showed that inflation picked up in April, excluding the April 1 sales tax hike - a welcome sign in the Bank of Japan’s battle to bring inflation to 2 percent.
Japan’s core consumer prices jumped 3.2 percent in April from a year earlier, the fastest gain since February 1991 as the sales tax hike boosted prices across the board.
The increase in the core consumer price index, which excludes volatile fresh food prices but includes oil products, compared with economists’ median estimate for a 3.1 percent rise, the Ministry of Internal Affairs and Communications said.
The BOJ estimates that the sales tax rise will add 1.7 percentage points to Japan’s annual consumer inflation in April and 2.0 points from the following month. The government ministry issuing CPI data does not provide similar estimates.
Summer bonus payments in June could help support consumer spending, but there are lingering concerns that declines in real wages will weigh on consumption in the medium term.
The government raised the sales tax on April 1 to pay for rising welfare costs. A second tax hike to 10 percent is scheduled for October next year.
Excluding the tax hike, inflation accelerated from the 1.3 percent level in the previous month.
Industrial output fell 2.5 percent in April, more than a median market forecast of a 2.0 percent fall.
Manufacturers surveyed by the Ministry of Economy, Trade and Industry expect output to rise 1.7 percent in May and decline 2.0 percent in June. The ministry downgraded its assessment of output, saying it is flattening out as a trend.
In separate data, the jobless rate held steady at 3.6 percent in April and the jobs-to-applicants ratio rose to 1.08 from 1.07 in the previous month, matching a high last seen in July 2006 in a sign of strong labour demand.
Editing by Eric Meijer