Sept. 28 (Bloomberg) -- Japan's Nikkei 225 Stock Average fell, led by domestic demand-oriented shares, on signs the world's second-largest economy is faltering after unemployment unexpectedly rose and consumer prices dropped for a seventh month.

Circle K Sunkus Co. declined 2.7 percent after the convenience store chain said it expects first-half profit to slide 20 percent. Millea Holdings Inc. lost 1.7 percent. The Bank of Japan's Tankan survey next week will probably show business sentiment slid to the lowest level since June 2006.

Commodities companies climbed, led by Inpex Holdings Inc., after oil prices rose 3.2 percent in New York to the second- highest close ever.

Canon Inc. led exporters higher after a decline in U.S. new homes sales raised speculation the Federal Reserve will cut interest rates to bolster Japan's biggest overseas market.

``A fundamental perspective does not favor domestic demand companies, as their opportunities for growth look slim,'' said Hiroyoshi Nakagawa, who helps oversee about $1 billion in Asian equities at Societe Generale Asset Management Co. ``The best bets for outperformance are in companies dependent on China such as commodities, shipping and machinery stocks.''

Benchmarks fluctuated between gains and losses. The Nikkei 225 lost 46.53, or 0.3 percent, to 16,785.69 in Tokyo, after rising as much as 0.6 percent and changing directions 18 times. The Topix index added 1.5, or 0.1 percent, to 1,616.62. Decliners outnumbered gainers by 881 to 720 in the first section of the Tokyo Stock Exchange.

For the week, the Nikkei gained 2.9 percent, while the Topix rose 4.2 percent. The Topix fell 8.9 percent in the June-Sept. quarter, the worst performance in five years.

Falling Prices

Tokyo-based Circle K, which operates more than 6,000 convenience stores, fell 49 yen, or 2.7 percent, to 1,785. Millea, the nation's largest property and casualty insurer by market value, lost 80 yen, or 1.7 percent, to 4,620. Consumer prices excluding fresh food fell 0.1 percent in August from a year earlier, as retailers absorbed higher costs to keep prices low and attract customers. Unemployment rose to 3.8 percent from 3.6 percent. Economists had forecast the rate would be unchanged.

The Bank of Japan's quarterly Tankan survey, set to be released on Oct. 1, will probably show business sentiment among major manufactures fell to 21 points in the third quarter from 23, according to economists. That would be the lowest level since June 2006.

Rising Income Gap

``Next week's Tankan is expected to be weak as the yen has started to strengthen and the subprime problem is in the back of everyone's mind,'' said Daisuke Shimazu, an investment manager at Sumitomo Trust & Banking Co., which has about $200 billion in assets. ``There's no reason to be buying domestic demand stocks.''

Meanwhile, income disparity is increasing in Japan, the Asahi newspaper said, citing a report released by the National Tax Agency. There were more than 10 million people whose annual income was less than 2 million yen ($17,370) last year, an increase of 420,000 from the year before, while those earning more than 10 million yen increased.

``Disposable income in Japan is not increasing, and the middle class is shrinking, which indicates that earnings at domestic companies are not going to improve,'' said Societe Generale's Nakagawa.

Housing starts fell 43.3 percent in August from the year earlier, the government said during the afternoon session.

Daiwa House Industry Co, Japan's second-biggest homebuilder by market value, erased a 3 percent gain to finish down 1 yen, or 0.1 percent to 1,499. Sekisui House Ltd., the biggest, added 8 yen, or 0.6 percent, to 1,446.

Oil Jumps

Inpex gained 10,000 yen, or 0.9 percent, to 1.18 million. Japan Petroleum Exploration Co., Japan's second-largest oil explorer, jumped 190 yen, or 2.3 percent, to 8,540. Sumitomo Corp., the nation's No. 3 trading house, rose 25 yen, or 1.1 percent, to 2,220.

Crude oil for November delivery rose $2.58 to settle at $82.88 a barrel in New York, the biggest one-day gain since May 17. A measure of six metals traded on the London Metal Exchange, including copper and zinc, added 0.7 percent yesterday to the highest since Aug. 2.

Canon, which generated almost 75 percent of its sales from overseas last year, climbed 160 yen, or 2.6 percent, to 6,270. Toshiba Corp., the world's second-biggest maker of flash memory chips, climbed 17 yen, or 1.6 percent, to 1,073.

Traders increased bets that the Fed will lower its benchmark rate after prices of new homes dropped by the most since 1970.

Chinese Nuclear Contract

The odds of a quarter-percentage point rate cut to 4.5 percent at the central bank's Oct. 31 policy meeting were 88 percent yesterday, up from 86 percent the previous day, futures contracts showed. Futures are also pricing in a 67 percent chance of another quarter-percentage point cut at the Dec. 11 meeting.

New home purchases slid 8.3 percent to an annual pace of 795,000, the lowest level in more than seven years, the Commerce Department said today in Washington. The median price dropped 7.5 percent from a year ago, the worst decline since 1970.

Limiting losses, Japan's industrial production rose 3.4 percent from July to a record, the trade ministry said. Spending by households climbed 1.6 percent from a year earlier, beating forecasts for a 1.2 percent gain.

Mitsubishi Heavy Industries Ltd., Asia's biggest maker of power equipment, rose 14 yen, or 1.9 percent, to 751 after the company said it will sign a contract today to supply a nuclear station in China, the world's fastest-growing major economy.

Daiichi Sankyo Co., Japan's third-largest drugmaker, surged 150 yen, or 4.6 percent, to 3,450 after it won U.S. approval for a new blood-pressure treatment that combines its Benicar with the active ingredient in Pfizer Inc.'s Norvasc.

Takefuji Corp., the country's No. 4 consumer lender, jumped 125 yen, or 5.8 percent, to 2,280. It earlier rose as much as 11 percent after announcing a plan to buy back its shares.

Mitsubishi Motors Corp., jumped 8 yen, or 4.8 percent, to 175, the biggest one-day gain since Aug. 20, after the company tripled its half-year operating profit forecast on higher overseas sales.

SFCG Co. jumped by its upper limit of 2,000 yen, or 14 percent, to 16,090. The financial services provider said full- year operating profit, or sales minus the cost of goods sold and administrative expenses, rose 29 percent to 34.6 billion yen, with a 5.5 percent rise in revenue.

Nikkei futures expiring in December fell 0.2 percent to 16,830 in Osaka and declined 0.1 percent to 16,825 in Singapore.

Canon Inc. (7751 JT)
Circle K Sunkus Co. (3337 JT)
Daiichi Sankyo Co. (4568 JT)
Daiwa House Industry Co. (1925 JT)
Inpex Holdings Inc. (1605 JT)
Japan Petroleum Exploration Co. (1662 JT)
Millea Holdings Inc. (8766 JT)
Mitsubishi Heavy Industries Ltd. (7011 JT)
Mitsubishi Motors Co. (7211 JT)
Sekisui House Ltd. (1928 JT)
SFCG Co. (8597 JT)
Sumitomo Corp. (8053 JT)
Takefuji Corp. (8564 JT)
Toshiba Corp. (6502 JT)

To contact the reporter on this story: Kiyori Ueno in Tokyo at kueno2@bloomberg.net; Patrick Rial in Tokyo at prial@bloomberg.net.

Last Updated: September 28, 2007 04:07 EDT