Japan's jobless rate was flat in December but the ratio of jobs to applicants hit a two-year low, suggesting that rising raw material costs and growing pessimism on the economy are making firms reluctant to boost hiring.
However, overall household spending and retail sales rose modestly in December from a year earlier, although this did not alter views that slack consumption and fears of a U.S. recession might force the Bank of Japan to cut rates this year.
"These labor figures point to a slowdown in the Japanese economy. Companies are curbing hiring amid growing uncertainties for the economic outlook," said Mamoru Yamazaki, chief economist at RBS Securities.
"With costs rising, it it getting harder for companies, especially small- and mid-sized ones, to raise wages."
The unemployment rate was 3.8 percent in December, slightly less than the 3.9 percent expected by economists.
Japan's jobless rate has crept up from a nine-year low of 3.6 percent seen last July, suggesting the job market is stalling as small firms, which employ seven out of 10 workers, lack pricing power and have held back on hiring.
The jobs-to-applicants ratio for December was 0.98, meaning 98 jobs were available per 100 applicants, below the market forecast of 0.99 and the lowest reading since October 2005.
Financial markets showed limited reaction to the data, with gains in Wall Street stocks mostly behind a 2 percent rise in Tokyo's Nikkei 225 Average
Economics Minister Hiroko Ota told reporters after the data release that job conditions were improving as a trend but were currently "running on the same spot".
Overall household spending in Japan rose 2.2 percent percent in December from a year earlier in price-adjusted real terms, to the surprise of economists that had expected a 0.2 percent fall amid tumbling stock prices and rising food prices that have hurt consumer sentiment.
Japanese retail sales rose 0.2 percent in December from a year earlier, slightly higher than a consensus forecast for a 0.1 percent rise.
The rise was largely due to a rise in oil prices, a government official said, adding annual retail sales fell in 2007 for the first time in five years due to slack auto sales and stable weather.
The BOJ left rates unchanged at 0.5 percent last week as widely expected. Turbulent markets and worries about a U.S. recession have heightened views that the central bank could abandon its rate-hike bias and cut rates sometime this year.