Dec. 28 (Bloomberg) -- Japan's inflation rose at the fastest pace in more than nine years in November and industrial production and household spending declined, signaling rising oil costs may derail the economy's longest postwar expansion.

Core consumer prices, which exclude fresh food, climbed 0.4 percent from a year earlier, the statistics bureau said today in Tokyo. Factory output slid 1.6 percent from a month earlier. Households cut spending 0.6 percent, the first drop since July.

Wages fell and employment prospects worsened as job seekers outnumbered vacancies for the first time in two years, the Labor Ministry said today. Surging energy costs rather than consumer spending are driving inflation, making it likely the Bank of Japan will refrain from raising interest rates as growth slows.

``Japan's economy is entering into a new phase of accelerating inflation and slowing growth,'' said Susumu Kato, chief economist at Calyon Securities in Tokyo. ``The bank will probably keep rates on hold in the next two to three quarters.''

The jobs-to-applicants ratio fell to 0.99 in November from 1.02 in October, the Labor Ministry said. Wages slid 0.2 percent from a year earlier. Pay has only risen in one month this year.

The yield on Japan's 10-year bond fell 4.5 basis points to 1.5 percent at the close in Tokyo. The Topix stock index tumbled 1.6 percent, capping off a 12 percent drop for the year, making Japan the worst performer of the world's 10 biggest markets.

Faster Than Expected

Core consumer prices rose faster than the 0.3 percent median estimate of 36 economists surveyed by Bloomberg News. Gasoline and kerosene contributed three-quarters of the gain, which was the quickest since March 1998, when an increase in the country's sales tax pushed the gauge to 1.8 percent.

Food and oil costs are fanning inflation across Asia. South Korea's consumer prices rose to a three-year high in November and China's inflation was the quickest in 11 years. Singapore's consumer prices rose the most in 25 years.

``The gain was mainly due to rising oil prices and not because of higher wages and consumer demand,'' Mari Iwashita, a strategist at Daiwa Securities SMBC Co. in Tokyo. ``The central bank probably won't raise rates until July at least.''

Inflation stemming from higher energy costs is ``undesirable'' because it may choke off spending by consumers and companies, Economic and Fiscal Policy Minister Hiroko Ota told reporters in Tokyo. She said the economy is still trying to shake off deflation.

Deflation Fight

The Bank of Japan raised the benchmark overnight lending rate in July 2006 after holding it near zero for more than five years to fight deflation. Policy makers doubled the rate to 0.5 percent in February and have kept it on hold since.

Japan's last bout of higher inflation amid slowing job growth was during a recession a decade ago. This time it may be worse for consumers: wages have fallen an average 0.5 percent this year. In 1997, they rose 1.7 percent.

``The economic slowdown since mid-2007 is now causing, after a time lag, deterioration in the labor market,'' said Naoki Murakami, an economist at Goldman Sachs Group Inc. in Tokyo. ``With employment now starting to slow, we see little likelihood of a recovery in consumption.''

Retail sales rose 1.6 percent, the fastest gain in two years, as consumers paid more for gasoline and food, the Trade Ministry said today. Households last month became the most pessimistic they've been in almost four years.

``Drivers can't quit driving just because oil got more expensive,'' said Takahide Arai, a Trade Ministry spokesman.

Taxi Fares

Tokyo's taxi operators this month increased fares for the first time in a decade. All Nippon Airways Co., Japan's largest domestic airline, last week said it will raise some domestic fares from April 1.

Gasoline climbed to a record 155.5 yen a liter on Dec. 10 and retail kerosene surged to the highest ever last week. Japan imports virtually all of its oil and many households rely on kerosene for heating.

J-Oil Mills Inc. said on Dec. 26 it plans to raise margarine prices about 10 percent in March because of higher edible-oil costs. Chuetsu Pulp & Paper Co. said it will increase copy paper prices for the second time in five months.

Higher oil prices are eating into corporate profits, which fell for the first time in five years last quarter. Last month's drop in factory production came as exports to the U.S., Europe and China all slackened as the effects of the U.S. housing recession and global financial-market turmoil spread.

The worsening economic situation at home and abroad may mean the Bank of Japan's next decision will be to cut, not raise, the key interest rate, some economists said.

``Deteriorating external conditions have virtually exhausted the chances of a rate hike in 2008,'' Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo, said today. ``The near-term theme is likely to shift to a rate cut rather than a hike.''

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

Last Updated: December 28, 2007 02:56 EST