UPDATE 2-Japan household spending drops, BOJ hike in doubt

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TOKYO, Jan 30 (Reuters) - Japan's household spending fell more than expected and the jobless rate rose slightly in December, underlining sluggishness in consumption and raising the hurdle for the Bank of Japan to lift interest rates next month.

Traders are focusing on consumption-related data as BOJ Governor Toshihiko Fukui has cited weak consumption as a reason for delaying a rate hike.

"Overall, the economic picture has not changed much since December, when the BOJ seems to have started thinking about a rate hike," said Naomi Hasegawa, a senior strategist at Mitsubishi UFJ Securities.

"The economic figures published so far are unlikely to change the minds of those who supported keeping rates on hold at the previous (BOJ) policy meeting," she said.

Tuesday's data showed that overall household spending in Japan fell 1.9 percent in December from a year earlier, below a median market forecast of a 1.2 percent decline. It was the 12th straight month of year-on-year declines.

Government data also showed that Japan's unemployment rate rose to 4.1 percent in December from 4.0 percent in November.

Separate figures showed that Japan's industrial output rose more than expected in December from a month earlier, underscoring the view that corporate activity remains firm.

Japanese government bond futures edged up after the data. March 10-year JGB futures ended the morning at 134.38 2JGBv1, up 0.03 points. But the yen JPY= was little changed, trading around 121.60 yen to the dollar as of 0219 GMT.

Economics Minister Hiroko Ota said on Monday that mild weather has likely played a part in weak spending, while many economists blame slow rises in wages but expect a tightening labour market to lift wages eventually and stimulate consumption.

The BOJ kept the overnight call rate target at 0.25 percent at its January policy board meeting by a split vote of 6-3, and its policy board meets next on Feb. 20-21.

Although monetary policy is in the hands of the BOJ, that hasn't stopped others speaking their minds and putting the BOJ in a difficult spot. Japanese government officials say they prefer low rates to keep the economic recovery going, but governments elsewhere appear to be increasingly uncomfortable with the resulting weakness in the yen.

Bloomberg News reported on Tuesday that European governments plan to warn the BOJ at next week's Group of Seven meeting in Germany that the delay in rate rises in Japan is distorting the value of an already weak yen.

The yen hit a record low against the euro and a 14-year low against the pound after the BOJ held rates steady this month.

WAGE EARNERS CAUTIOUS

In one bright sign, wage earner households' real average income rose 6.5 percent in December from a year earlier, marking the largest gain since June 1990.

A government official said the discrepancy between the strong rise in income and the continuing weakness in spending is probably because consumers remain cautious on the outlook.

The household spending data is the basis of the private consumption component in Japan's gross domestic product.

The employment data also showed that the December jobs-to-applicants ratio was 1.08, meaning 108 jobs were available per 100 applicants, up from 106 in November.

For 2006 the ratio improved to 1.06 from 0.95 in 2005, the first time above 1.00 since 1992, when it stood at 1.08.

Economists said that while industrial production showed a stronger rise than expected in December, weakness in forecasts for manufacturers' output in the coming months remains a concern.

Industrial production rose 0.7 percent in December from a month earlier, higher than a median market forecast of a 0.3 percent rise. The trade ministry said manufacturers' output -- the core component of production -- is expected to fall 2.8 percent in January but to grow 0.1 percent in February.

Japan's economy grew an annualised 0.8 percent in July-September, the seventh straight quarter of growth. Growth has been slowing despite robust corporate capital spending on the back of firm exports, due to weak personal consumption.

But many economists expect the world's second-largest economy to have rebounded in October-December. Fourth-quarter GDP data is out on Feb. 15.

Takeshi Minami, chief economist at Norinchukin Research Institute, said he expects private consumption to show a rise of 0.6-0.7 percent in October-December GDP from the previous quarter, compared with a 0.9 percent fall in July-September.