TOKYO, May 26 (Reuters) - Japan must avoid causing an

unforeseen spike in interest rates amid heightened market

concern over its finances, private members of a key government

economic panel said on Monday following rises in super-long bond

yields to record highs.

The Council of Economic and Fiscal Policy members also said

Japan must focus on sustaining wage gains, rather than resort to

tax cuts, to help households cope with rising food costs.

Japan's 40-year government bond yield hit a record 3.675%

last week while the 30-year yield climbed to an all-time high of

3.185%, as mounting political calls for tax cuts and big

spending drew investor attention to its fiscal woes.

Japan must restore fiscal health while revitalising the

economy "to avoid heightening market concern over its long-term

fiscal sustainability and causing an unforeseen rise in interest

rates," the panel members said.

Prime Minister Shigeru Ishiba has pushed back against calls

to cut Japan's consumption tax rate, warning that doing so with

additional debt issuance would worsen the country's dire fiscal

state.

"Consumer sentiment is worsening due to persistent inflation

mainly for food. Rather than resort to tax cuts without a source

of funding, Japan must expand the economy and ensure wage hike

momentum is sustained," the members said.

The panel's proposals lay the groundwork for the

government's discussion on economic policy.

Japan's economy shrank for the first time in a year in the

January-March quarter on stagnant consumption and falling

exports. Analysts expect U.S. tariffs to further weigh on the

export-heavy economy and some project another contraction in the

second quarter.