March 16 (Bloomberg) -- Demand for services in Japan rose more than expected to a record in January, a sign consumer spending has picked up and may support growth in the world's second-largest economy.

The tertiary index, a gauge of money spent on consumer and business services, advanced a seasonally adjusted 1.6 percent to 110.7 from December, the first increase in three months, the trade ministry said today in Tokyo. The median estimate in a Bloomberg News survey of 34 economists was 1.1 percent.

An increase in spending on items such as travel, insurance and entertainment suggests consumption may join exports and corporate investment as a driver of the nation's longest postwar expansion. Hiroshi Watanabe, the top currency official, said today that jobs growth may spur consumer spending, which makes up more than half of the economy.

``The big chorus that consumer spending is weak will gradually fade out,'' said Takuji Aida, chief economist for Japan at Barclays Capital in Tokyo. ``We are likely to see solid consumption in the first quarter.''

Japan's yen strengthened to 116.85 against the U.S. dollar at 12:15 p.m. in Tokyo from 117.33 before the report was released. The Nikkei 225 Stock Average fell 0.9 percent, the third time in four days it has declined.

The economy grew an annualized 5.5 percent in the fourth quarter, the fastest pace in three years, as companies increased spending on machinery and factories amid booming demand for exports, helping make up for sluggish consumption.

`Very Good'

Japan's economic growth will be sustained ``in a very good manner'' Watanabe, vice finance minister for international affairs, said in Sydney. ``Employment is getting better, job offers are increasing. That has a rather good impact on consumption.''

The Bank of Japan doubled the benchmark interest rate to 0.5 percent last month and said further increases will be gradual. The bank will probably keep the overnight lending rate unchanged next week, according to all 48 economists surveyed by Bloomberg News.

Demand at travel agents climbed 2.5 percent in January, driven by domestic travel bookings, today's report showed. Demand for postal services increased 34.2 percent.

Sports facilities' demand, mainly golf courses and golf ranges, jumped 13.9 percent as warmer weather encouraged people to undertake outdoor activities, said Masato Hisatake, a trade ministry spokesman.

Demand for personal services, such as hairdressing, rose 5.5 percent in January. Demand at insurers advanced 7.7 percent.

Eight-Year Low

Japan's unemployment rate was at an eight-year low of 4 percent from November to January. The jobs-to-applicants ratio, which shows how many positions are available to each job seeker, is 1.06. Jobs have outnumbered applicants for more than a year.

The service index suggests ``a pickup in consumer spending,'' said Yasukazu Shimizu, a senior economist at Mizuho Securities Co. ``As the labor market tightens, consumers feel more secure about spending.''

Still, growth in consumer spending may not accelerate until wages pick up. Wages fell 1.4 percent in January, the largest drop in almost 2 1/2 years, according to a government report this month.

A round of wage increases announced by Japanese companies, including Toyota Motor Corp. and Sharp Corp., this week may do little to spur consumption. ``The modest wage increases won't help much,'' said Yasuo Yamamoto, a senior economist at Mizuho Research Institute in Tokyo.

Spending Guide

Spending by Japanese on services accounted for more than 57 percent of total consumption last year, compared with 50 percent a decade ago. Service providers include real estate agents and hotels.

The tertiary index has become a more reliable guide to trends in spending with the shift in the pattern of consumption, said Masamichi Adachi, an economist at JPMorgan Securities Japan Co.

Japan's household spending rose for the first time in more than a year in January, when temperatures were 1.4 degree Celsius (2.5 degrees Fahrenheit) higher than average. Consumer confidence improved to 48.4 in February from 48.1 in the previous month.

``January was good for the services industry with a warm winter and a New Year holiday,'' Adachi said. ``Consumers have enough manufactured products at home and services are what they are spending on now.''

To contact the reporters on this story Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

Last Updated: March 15, 2007 23:25 EDT