Jan. 18 (Bloomberg) -- Japan's consumer confidence dropped to its lowest level in more than four years as falling wages and rising gasoline and food prices squeezed households.

The sentiment index slid to 38 last month from 39.8 in November, the Cabinet Office said today in Tokyo. Confidence among consumers, whose spending accounts for more than half of the economy, hasn't been this low since June 2003, when unemployment was close to a postwar high.

A consumption slump leaves companies from Toyota Motor Corp. to Matsushita Electric Industrial Co. more dependent on overseas demand just as the U.S. slowdown threatens to spill through Asia. Record energy costs have hit Japanese consumers and their employers, darkening the outlook for pay increases and spending.

``It's easy to see why people are depressed,'' said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. ``People think inflation is accelerating and wages aren't.''

The median estimate of nine economists surveyed by Bloomberg News was for confidence to fall to 38.2. A reading below 50 in the survey, which measures sentiment of households of two people or more, signals pessimists outnumber optimists.

Consumer confidence is also waning elsewhere. Americans became the most pessimistic in more than two years in December. Australian consumer confidence dropped the sharpest in 14 months in January after gasoline prices jumped and stocks plunged.

Falling Stocks

Declining shares may deepen households' woes in Japan. The Nikkei 225 Stock Average tumbled 9.5 percent in the first 10 trading days of 2008. That's the worst start to a year since 1997, according to Bloomberg data.

The Nikkei gained 0.6 percent in Tokyo today. The yen traded at 107.27 at 4:47 p.m. from 107.09 before the report.

There's a 50 percent chance Japan will slip into recession, according to Goldman Sachs Group Inc. Bank of Japan Governor Toshihiko Fukui said last week that growth in the world's second-largest economy is slowing and the cycle of profits feeding into higher wages and spending is ``weakening.''

A Bank of Japan survey this week showed that 86 percent of people are concerned prices will climb this year, the highest since 1997, when the bank started asking consumers about their expectations for inflation. More than half of the survey's respondents said they plan to spend less this year.

Nisshin Foods Inc., Japan's biggest macaroni maker, will raise pasta prices to counter higher wheat costs. Nissin Seifun Group Inc., which owns Nisshin Foods, will increase wholesale prices as much as 40 percent, the company said yesterday.

Noodles, Mayonnaise

Record gas prices at the pump and media hype about price increases for instant noodles, mayonnaise and beer has created the impression that inflation is worse than it is, according to Macquarie's Jerram.

``It is difficult to be relaxed about the surge in inflation expectations, even though it seems to be detached from reality,'' Jerram said. ``There is a serious risk of a change in behavior due to the drop in confidence.''

The central bank survey shows people expect prices to rise by 7.3 percent over the next 12 months. By contrast, the government says the economy has yet to beat its decade-long bout with deflation. Economists forecast consumer prices excluding fresh food will rise only 0.3 percent in the year starting April.

Businesses that ask customers to pay more are taking a risk. Pressed by record gasoline prices, taxis in Tokyo raised fares last month for the first time in a decade only to find sales drop 2.8 percent, according to the Tokyo Taxi Association.

Can't Raise Prices

Companies can't raise prices because consumers, who've seen average pay drop 10 percent in the last decade, won't stand for it, according to Hiromichi Shirakawa, chief economist at Credit Suisse Group in Tokyo. The flip side is that companies can't raise wages unless they can raise prices to reflect higher costs.

Wages gained 0.1 percent in November from a year earlier, revised Labor Ministry figures showed today. That was only the second monthly increase in the first 11 months of 2007.

Rising energy costs caused profits at small and midsized companies to fall in the third quarter for the second time in five years. That's dimmed the outlook for pay rises for the 70 percent of Japanese workers employed by those businesses.

``It's the worst of both worlds,'' Jerram said. ``You have companies getting squeezed and you have consumers with the perception they're getting squeezed.''

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net

Last Updated: January 18, 2008 02:51 EST