UPDATE 1-Japan job woes deepen but consumption points up

* Jobless rate rises to 5.2 pct, highest since 2003

* Job availability sinks to record low

* Household spending rises, pointing to positive GDP (For more stories on the Japanese economy click [ID:nECONJP])

By Tetsushi Kajimoto

TOKYO, June 30 (Reuters) - Japan's jobless rate rose to a new 5-1/2-year high in May and job availability sank to record low but government stimulus efforts prompted a modest rise in household spending, reinforcing forecasts the economy will return to growth in the current quarter.

But the jobs data suggests any recovery is likely to be tempered by sluggish domestic demand, even as the country's export industries start to recover from a sharp downturn in the global economy.

"No one expects that the labour market is improving yet. Labour indicators are always lagging indicators to the business cycle and we are still in a very early stage of recovery so probably the deterioration of the labour market continues but at a more moderate pace," said Masamichi Adachi, a senior economist at JP Morgan.

Although some leading economic indicators, such as industrial output, have rebounded in recent months many companies are expected to keep cutting costs on wages to churn out profits even under weaker demand.

As they stop hiring, the jobs-to-applicants ratio slid to 0.44, meaning about four jobs were available for every nine applicants. It was the lowest reading since the data started in 1963 and below a median market forecast of 0.45. [JPJOBA=ECI]

The seasonally adjusted unemployment rate rose to 5.2 percent -- the highest since September 2003 and in line with the market forecast -- from 5.0 percent in April. [JPUNR=ECI]

Economists expect the jobless rate to rise beyond a postwar peak of 5.5 percent, hurting domestic consumption, which had seen a limited recovery even during the boom years as the population ages.

The number of employed people sank by 1.36 million from a year earlier, a record rate, as both manufacturers and the service sector cut staff, an official said.

"Even though industrial output is rebounding, that won't help boost employment as the level of production is at low levels," he told a briefing.

But household spending unexpectedly rose 0.3 percent in May from a year earlier in price-adjusted real terms, when economists on average forecast for a decline of 1.6 percent. [JPALLS=ECI]

Economists warn against reading too much into the government consumption data, which they say has sampling flaws, but the uptick follows government stimulus such as a one-off cash payments to each household and subsidies on energy efficient products.

"Consumption is looking likely to escape the direct impact of the high jobless rate, thanks to the impact of government measures to promote environmentally friendly cars and consumer electronics, which apparently helped boost household spending in May," said Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset Management.

The rebound in consumption bolstered expectations that the world's second-largest economy will climb out of recession in April-June after four straight quarters of contraction, Japan's longest spell of contraction on record.

Economists polled by Reuters forecast growth of 0.4 percent expected in April-June. [ECILT/JP]

Still, consumer prices started falling even after stripping out the impact of cheaper energy prices, with so-called core-core index falling 0.5 percent in May, the biggest fall in two years, reflecting persistently weak domestic consumption.

The spectre of deflation is likely to keep the Bank of Japan from seeking an exit from easy monetary stance in the near future, economists also said. (Editing by Michael Watson)