Oct. 31 (Bloomberg) -- Japan's unemployment rate unexpectedly rose, wage growth stalled and household spending fell, undermining the Bank of Japan's case for raising interest- rates.

The jobless rate climbed to 4.2 percent in September and household spending fell 6 percent, the statistics bureau said today in Tokyo. Wages including overtime and bonuses were unchanged, the labor ministry said in a separate report.

Stagnant wages may delay the pickup in consumer spending needed to insulate the economy from a slowdown in the U.S., Japan's largest export market. The central bank, which releases its semi-annual outlook report today, has said it will examine prices as well as the economy when making a decision on raising interest rates for a second time in six years.

``It's clear private consumption doesn't have momentum and the reason is wages,'' said Hiroshi Shiraishi, an economist at Lehman Brothers Japan Inc. Consumer spending may be a drag on economic growth in the third quarter and ``that would make it difficult for the Bank of Japan to raise rates this year.''

The yen traded at 117.65 per dollar at 10:34 a.m. in Tokyo compared with 117.49 before the reports were released. The jobless rate was higher than the 4.1 percent median forecast of 33 economists surveyed by Bloomberg News. The drop in household spending was almost three times as much as forecast.

Industrial production fell from a record in September, a report showed yesterday, and may shrink in the fourth quarter should the slowest growth in three years in the U.S. cut orders.

Exports, Retail Sales

Japan's economy has suffered three recessions since 1991, two coming as export sales flagged. Slackening demand from abroad could ``spoil'' Japan's longest expansion since World War II, according to the Asian Development Bank.

Household spending has dropped every month this year, the statistics bureau report showed today. Retail sales have been ``flat,'' trade ministry spokesman Takahide Arai said last week.

``The private consumption story has long been the important missing link in the current Japanese recovery,'' Stephen Roach, chief economist for Morgan Stanley said in a note dated Oct. 20. ``A Japan that is lacking in support for a self-sustaining internal consumption dynamic is by definition more dependent'' on capital spending and external demand.

Raw Material Costs

Japanese businesses have been reluctant to increase salaries while costs of fuel and raw materials have been rising. An index of prices that companies pay for energy and raw materials such as iron ore surged 3.6 percent in September from a year earlier, the most in 25 years.

``Companies are maintaining better-than-expected profits by containing wages,'' said Hiromichi Shirakawa, chief economist at Credit Suisse Group in Tokyo. Slow pay growth is ``causing weak consumer spending.''

The jobs-to-applicants ratio, which shows how many positions are on offer to a seeker, held at 1.08 in September, as 110,000 people left the job market, the labor ministry said.

Pay gains since January amounted to only 8,400 yen ($70), about the cost of filling the tank on a Toyota Corolla. Average pay fell almost 10 percent between 1997 and 2005, a cut of more than 400,000 yen, the labor ministry says.

For every 100 job applicants in September there were only 64 fulltime positions available, down from 65 in January. Part- time and temporary positions were available at more than twice those rates.

Japan's jobless rate is the second lowest among the Group of Seven economies, behind the United Kingdom's 3 percent.

The economy is now in its 57th month of growth, equaling the so-called Izanagi boom of 1965-1970, the longest expansion since World War II. Japan's jobless rate hit 4.0 percent in May, the lowest since 1998.

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

Last Updated: October 30, 2006 20:39 EST