TOKYO (Reuters) - Japanese business sentiment improved in the three months to March but is set to weaken in the following quarter, the central bank's "tankan" survey showed, on concerns a sales tax hike kicking off this month will dent a fragile economic recovery.

COMMENTARY:

JUNKO NISHIOKA, CHIEF ECONOMIST, RBS SECURITIES, TOKYO

"There is no surprise in the headline figures. The BOJ will probably judge that corporate sentiment continued to recover although it was boosted by the temporary rush of demand before the consumption tax hike.

"Companies' outlook for sentiment weakened slightly but this trend is similar to what data showed when Japan hiked its sales tax the last time.

"Companies' price outlook (to be announced on Wednesday) will have deep implications for the BOJ's policy prospects. If the survey results show firms expect prices to rise, this suggests an environment in which it will be easier for them to pass on higher costs.

"This will make it clear that price changes will remain in positive territory.

"Today's data won't change our view that the BOJ is expected to move around July."

TAKESHI MINAMI, CHIEF ECONOMIST, NORINCHUKIN RESEARCH INSTITUTE, TOKYO

"The headline index for big manufacturers came out weak, probably reflecting sluggish external demand and exports.

"Coming on the heels of recent weak data such as industrial output, the weak reading could heighten market expectations for the Bank of Japan to ease policy further in the coming months.

"That said, I think the BOJ won't act anytime soon but that it wants to see how a pullback after the sales tax rise and a subsequent rebound will be. If the rebound proves weak in June, the BOJ could embark on additional stimulus as early as in July or August."

YASUO YAMAMOTO, SENIOR ECONOMIST, MIZUHO RESEARCH INSTITUTE, TOKYO

"Big companies are very worried about what will happen after the sales tax hike. Memories of the last sales tax hike in 1997 are still in the back of many corporate executives' minds."

"Capital expenditure plans are not really that firm at the start of the new fiscal year, but capex may not come on line until the second half of the fiscal year."

"Manufactures raised output before the sales tax hike, but they still have excess capacity, so that sector has not completely recovered."

"A lot of companies are facing shortages of workers, so the labor market will remain tight. This reflects our declining population, which will push up wages."

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LINK:

-- For full table, click on the BOJ's website: http://www.boj.or.jp/en/statistics/tk/gaiyo/2011/tka1403.pdf

(Reporting by Leika Kihara, Tetsushi Kajimoto, Stanley White and Kaori Kaneko; Editing by Dominic Lau)