Japan Unemployment
Members of All Japan Metal and Information Machinery Workers' Union (JMIU), the union representing dismissed IBM workers, hold a rally demanding the retraction of unjust dismissals to IBM Japan in front of the company headquarters in Tokyo on June 26, 2013. Reuters

(Reuters) - Japan's unemployment rate hit a 16-year low in May, suggesting the economy will rebound in the third quarter from a sales tax hike and consequent slump in consumer spending.

The jobless rate in the world's third-largest economy fell to 3.5 percent, the lowest since 1997 and a level the Bank of Japan says is near full employment.

At the same time, the availability of jobs rose to its highest level since 1992, good news for Prime Minister Shinzo Abe as he tries to cement a recovery after two decades of stagnation.

The strong employment numbers were published alongside other data on Friday showing Japan's household spending fell 8 percent in the year to May, four times the drop projected in a median market forecast and more than the 4.6 percent decline in April.

The tumble was due mainly to a pull-back in spending on housing, cars and household appliances - all of which saw a surge in demand before the sales tax hike on April 1.

"An (economic) contraction in the second quarter is a certainty, but the job market improvements are positive for the economy," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

The data is unlikely to change dominant market expectations that the BOJ will hold off on further monetary stimulus probably for the rest of this year, analysts say.

"The decline in household spending is too large to ignore, but if you exclude auto sales there are signs that spending is bottoming out," said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

Households spent more on items such as television sets, personal computers and clothing in May. Spending on eating out also stopped falling.

Separate data showed core consumer inflation eased slightly in May when excluding the effect of the tax hike, in line with the BOJ's projections that price gains will slow in coming months before accelerating again late this year.

The BOJ has signaled that it sees no immediate need to expand its massive stimulus program deployed in April last year, stressing that the cooling effect on consumption from the sales tax hike will be temporary.

The central bank has also said Japan is on track to meet its 2 percent inflation target sometime next year, although it projects consumer inflation to hover just above 1 percent for several months as the boost from a weak yen fades.

The BOJ estimates that the sales tax rise to 8 percent from 5 percent would add 1.7 percentage points to Japan's annual consumer inflation in April and 2.0 points from May onwards.

"As the BOJ projects, consumer inflation will probably slow in coming months but won't slip below 1 percent," Dai-ichi Life Research's Shinke said. "I don't see any reason for the BOJ to ease further for the rest of this year."


Analysts expect the economy to contract in the second quarter due to the tax hike, with a Reuters poll conducted in June projecting a 1.2 percent quarterly drop.

The contraction could be more severe given the weak spending data, although the strong job market and an expected increase in summer bonus payments will underpin spending.

"It may take a little longer for spending to recover, but there's no need to turn pessimistic on the economy," said Miyazaki of Mitsubishi UFJ.

The nationwide core consumer price index (CPI), which includes oil products but excludes the volatile prices of fresh food, rose 3.4 percent in the year to May, data showed on Friday, matching the median market forecast.

That was the fastest since April 1982 as the tax hike pushed up prices across the board.

Excluding the sales tax hike, core consumer inflation stood at 1.4 percent, a tad slower than the 1.5 percent annual increase in the previous month, mainly due to the fading effects of the weak yen and a rise last year in electricity bills.