Nov. 15 (Bloomberg) -- Japan's demand for services declined at the fastest pace in six months in September as factory production slowed.

The tertiary index, a gauge of money businesses and households spend on phone calls, power and transportation, fell 1.6 percent from August, when it rose a revised 1.2 percent, the Trade Ministry said today in Tokyo. The median estimate of 37 economists surveyed by Bloomberg News was for a 1 percent drop.

Companies may reduce spending as a housing recession in the U.S., Japan's biggest export market, cuts demand for the country's cars and electronics. Consumption at home, which accounts for more than half of the economy, is being curtailed by falling wages and a deteriorating job market.

``Nobody's holding their breath waiting for the Japanese consumer,'' said David Cohen, director of Asian economic forecasting at Action Economics in Singapore. ``Japan is still dependant on exports if it's going to keep growing.''

The yen traded at 111.38 per dollar at 9:11 a.m. in Tokyo from 111.18 before the report was published.

Demand for wholesale services led the declines, dropping 3.4 percent. Financial services fell 6.7 percent after gaining 1.6 percent in August, when investors adjusted positions after the collapse of the U.S. subprime mortgage market. Information and communication services slid 4.6 percent.

Slowing Exports

The world's second-largest economy expanded 0.6 percent in the third quarter from the previous three months, when it shrank 0.3 percent, the government said this week. Net exports, the difference between exports and imports, accounted for two thirds of the growth, and recent reports show they have been cooling.

Shipments overseas grew at the slowest pace in two years in September, and companies cut production 1.4 percent from the previous month.

Japan's jobless rate jumped to 4 percent in September from 3.6 percent two months earlier. Wages fell in nine of the 10 months to September and mid-year bonuses, about 10 percent of a worker's annual income, dropped for the first time in three years. Household sentiment fell to a three-year low.

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

Last Updated: November 14, 2007 19:13 EST