Japan's household spending fell more than expected in February and unemployment rose, suggesting the world's second-largest economy may not be able to rely on consumers to drive a recovery from recession.

Spending by households headed by a salaried worker dropped 4.1 per cent from January, seasonally adjusted, the statistics bureau said yesterday in Tokyo. Unemployment rose to 4.7 per cent from a six-year low of 4.5 per cent and retail sales fell 2.7 per cent, the biggest drop in more than a year, separate reports showed.

Japan is counting on a recovery in consumer spending, which makes up half the economy, as export growth falters. Spending at retailers including Isetan Co may be slow to recover because companies are not raising wages fast enough, said economist Glenn Maguire.

"The recovery in consumption is going to be very, very gradual," said Maguire, chief economist at Societe Generale in Hong Kong. "Firms are retaining funds rather than dispensing them to workers in high salaries, and that's what you need to see for consumption to strengthen."

The Nikkei 225 Stock Average fell 1.6 per cent to 11,599.82 at the 3 pm close of trading in Tokyo, led by Ito-Yokado Co and Nippon Telegraph & Telephone Corp.

Household spending had been expected to drop 2.9 per cent, according to the median of four forecasts in a Bloomberg survey of economists. Unemployment was expected to be unchanged, according to the median of 32 forecasts.

Japan's 10-year bonds rose, sending yields to a seven-week low. The yield on the benchmark 1.5 per cent bond due in March 2015 fell 2 basis points to 1.350 per cent, the lowest since February 9. A basis point is 0.01 of a percentage point.

"We can't expect consumer spending to become the engine to pull the Japanese economy," said Naoki Iizuka, chief economist at Dai-Ichi Life Research Institute in Tokyo. Dai-Ichi Mutual Life Insurance Co, the nation's second-largest insurer by assets, has the equivalent of US$93 billion in Japanese bonds.

Japan slipped into recession in the second quarter of last year as consumer spending sagged and exports slowed, after growing at a 6 per cent annual pace in the first three months. The economy recovered in the fourth quarter, expanding at a 0.5 per cent pace, as manufacturers replenished stockpiles.

Exports rose at the slowest pace in more than a year in February as shipments of electronic equipment declined, casting doubt on the strength of the recovery. Exports rose 1.7 per cent from a year earlier, a government report showed March 23.

Isetan, Japan's fourth-biggest department store, lowered its net income forecast 31 per cent to 11 billion yen (US$102.9 million) for the year ending March 31, the company said on March 25.

"Consumer spending has stayed stagnant," Norio Yamaguchi, senior vice president of Ajinomoto Co, Japan's largest food company, told reporters on March 23. "Companies have to see if they can come up with the products that can spur spending."

A rebound in wages may be curbed as companies cut costs to protect profits, which a government survey showed rose 17.6 per cent last quarter. Wages rose for a second month in three in January after a nine-year slide.

Nissan Motor Co, Japan's second-largest automaker, capped its monthly wage increase to less than 1 per cent in the year ending March 31.

Unions are refraining from asking for monthly wage increases and are accepting higher bonuses alone because of concerns about manufacturers shifting production overseas to cheaper countries.

Japan's economy lost 280,000 jobs in February, and the workforce fell by 190,000, yesterday's unemployment report showed. The economy added 470,000 jobs in January, the most since 1992. Over the two-month period, the economy added 190,000 jobs.

"Labour conditions are basically improving," Chief Cabinet Secretary Hiroyuki Hosoda said yesterday at a regular press conference in Tokyo. "There's no reason to be too concerned."

The gain in the unemployment rate was probably caused by a temporary decline in demand for workers in industries including healthcare, said Paul Sheard, chief economist at Lehman Brothers Japan Inc. Changes in the sample used for the survey may have exaggerated the loss of jobs, said Iizuka of Dai-Ichi Life Research Institute.

Eishi Yokoyama, a Tokyo-based economist at AIG Global Investment Corp, predicted spending will rise in the three months ended March 31 as the job market improves.

Japan's companies placed 3.3 per cent more job advertisements in February compared with a year earlier, according to the Association of Job Journals of Japan.

"It looks as if the ability of companies to squeeze wage incomes is diminishing, and from that point of view you would expect consumption to recover," said Richard Jerram, chief economist at Macquarie Securities Ltd in Tokyo.

(China Daily)