Nov. 10 (Bloomberg) -- Confidence among Japanese merchants slid to a five-month low in October, a sign that the country’s export-led recovery isn’t spreading to consumers.

The Economy Watchers index, a survey of barbers, taxi drivers and others who deal with consumers, fell to 40.9, the Cabinet Office said today in Tokyo. It was the biggest decline in 10 months.

The world’s second largest economy probably expanded for a second quarter in July through September, helped by more than 20 trillion yen ($222 billion) in stimulus measures that provided consumers with incentives to buy cars and electronics. Consumers haven’t been able to drive growth amid mounting job losses and plunging wages.

“The recovery may be approaching a slowdown,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “The worst is over, but to see real improvements in sentiment among consumers and retailers, we have to see a better job market.”

The Cabinet Office lowered its assessment of the index for the first time since December, noting that the gauge shows “weak trends have recently appeared” despite signs the economy has stopped worsening.

Even as the jobless rate unexpectedly dropped to a four- month low in September, Nishioka says the decline was driven by government stimulus measures and not a sign that gains in industrial production are spreading to consumers.

The government currently offers financial support to employers who place on leave, train, or transfer their employees because of sluggish business.

Excess Labor

Large manufacturers continue to carry excess labor, a central bank survey showed last month, a sign that employers may not be done firing workers and slashing salaries.

Japan’s largest companies plan to cut winter bonuses, often equivalent to several months of pay, at the fastest pace on record, according to the Japan Business Federation. Wages slumped for a 16th month in September.

While incentives to purchase fuel-efficient cars and home appliances will expire at the end of March, some analysts say the economic benefits of the incentives may run out even sooner.

“Will people really buy another car on top of the one they’ve already bought? No, they won’t,” said RBS’s Nishioka. “The effects will start to fade by year’s end.”

To contact the reporter on this story: Aki Ito in Tokyo at aito16@bloomberg.net

Last Updated: November 10, 2009 02:16 EST