Aug. 30 (Bloomberg) -- Japan's household spending fell for a third month in July, retail sales slumped and unemployment unexpectedly rose, suggesting a rebound in the world's second- largest economy is losing momentum.

Spending by households headed by a salaried worker dropped 3.5 percent from June, seasonally adjusted, the statistics bureau said today. Retail sales fell 2.2 percent in July, the trade ministry said. The jobless rate rose to 4.4 percent from 4.2 percent, as more people sought work.

Prime Minister Junichiro Koizumi, who faces elections on Sept. 11, is counting on spending by consumers and companies to spur growth as record fuel prices threaten to damp demand for exports. Today's report suggests that consumer spending, which accounts for more than half of Japan's economy, may contribute less to growth in the third quarter.

``The reports were a little bit disappointing,'' said Hiroshi Shiraishi, an economist at Lehman Brothers Japan Inc. ``The trend in the job market remains good and I expect to see consumer spending to continue to grow at a reasonable pace.''

The yen fell to 110.93 to the dollar as of 4:24 p.m. in Tokyo, from 110.62 late yesterday in New York.

The unemployment rate rose after the workforce expanded by 170,000, while the economy didn't add any new jobs, the government said.

``Part of the reason the unemployment rate worsened was because recent improvements in the job market is prompting more people to look for work,'' said Naoki Iizuka, chief economist at Dai-Ichi Life Research Institute in Tokyo.

Job Seekers

The female unemployment rate rose at the fastest pace since May 1997 to 4.3 percent as more women sought jobs because the economy showed more signs of sustaining a recovery from last year's recession, the statistics bureau said in a briefing today.

Japan's retail sales fell 2.2 percent in July, seasonally adjusted, the Ministry of Economy, Trade and Industry said today. The median forecast of 6 economists was for a decline of 0.5 percent, according to a Bloomberg survey. From a year earlier retail sales rose 0.6 percent, while the median forecast of 22 economists was for a gain of 2.5 percent.

Economists had expected the unemployment rate to remain unchanged from a seven-year low of 4.2 percent in June, and for household spending to rise 1 percent. Spending fell in July as purchases of cars and telecommunications declined by a fifth after increasing 7.5 percent in June, the statistics bureau said.

Consumer spending is still expected to rise in the next three to six months as companies hire more people, Shiraishi at Lehman said.

Higher Forecast

The economy expanded at a 1.1 percent annual pace in the second quarter driven by consumer and corporate spending, prompting brokerages including Morgan Stanley and Societe Generale SA to raise their forecasts for the year ending March. In the second quarter, consumer spending rose 0.7 percent. Capital spending jumped 2.2 percent.

Denso Corp., Japan's largest maker of automotive parts, hired 69 percent more workers in April than it did a year earlier as demand for automobiles improved.

Wages, including bonuses, overtime and commuting costs, started rising in January this year, increasing every month except for one. Monthly salaries haven't been rising for as long, increasing for only the first time since 2000 in April this year. Companies are more inclined to pay out higher bonuses rather than salaries to keep overall compensation costs down.

Higher Wages

Higher wages and better job prospects may help boost sales at companies such as Canon Sales Co., which markets Canon Inc.'s office equipment and cameras.

``Even in the heat, the flow of customers this summer was quite good. I have high expectations for the second-half, especially in the fourth quarter,'' Haruo Murase, president of Canon Sales, said in an interview on Aug. 26.

Dai-Ichi's Iizuka said the limited sample used in the survey for the report on household expenditure may have partly accounted for the fall in spending.

``Spending on autos fell considerably but this is probably because the survey does not sample enough people to accurately grasp trends. But when you strip away that factor the report was not so bad,'' he said.

Household spending fell 3.5 percent from June to average 323,515 yen ($2,924), the statistics bureau said.

Oil Risk?

Growth in Japan may be threatened after crude oil soared to a record above $70 a barrel in New York yesterday after Hurricane Katrina forced companies including Exxon Mobil Corp. and Chevron Corp. to shut operations in the Gulf of Mexico. Crude oil rose for a second day in New York on concern Hurricane Katrina damaged platforms and ports on the Gulf of Mexico, where 30 percent of U.S. oil is produced.

Rising oil prices may hurt consumer spending and corporate profits in Japan, Vice Finance Minister Koichi Hosokawa said yesterday.

``Should the rise in prices continue, there are concerns about how that will affect corporate profits, consumer spending and the global economy,'' Hosokawa said.

To contact the reporter on this story: Lindsay Whipp in Tokyo at lwhipp1@bloomberg.net

Last Updated: August 30, 2005 03:35 EDT