The world's second largest economy is in the midst of a record expansion as it recovers from recession in the 1990s, but concerns had persisted about weak consumer spending and job insecurity.

Japan's unemployment rate in 2007 averaged 3.9 per cent with 2.57 million without jobs, the internal affairs ministry said. It was down from 4.1 per cent or by 180,000 people from a year earlier.

It was the first time the jobless rate fell below four per cent since 1997 when it stood at 3.4 per cent, the ministry said.

'The annual figure proved that there is a steady recovery in Japan's job market,' said Masahiko Hashimoto, an economist at Daiwa Institute of Research.

'Although it appears to be taking a break now, gradual improvement is still expected thanks to growing demand for jobs at manufacturers and other export-oriented sectors,' he added.

In December, the nation's jobless rate was unchanged at 3.8 per cent from the previous month, the 25th consecutive monthly fall.

It was still better than the 3.9 per cent economists had expected on average, shored up by growing employment in the retail and transport sectors as well as medical, welfare and farming industries.

But the unemployment rate was above a trough of 3.6 per cent in July, which was the lowest since February 1998.

However, a separate report from the labour ministry showed there were more job seekers than job offers for a second straight month in December.

'We can see improvement but our assessment that the situation (in the job market) is at a standstill remained unchanged,' Hiroko Ota, the minister for economic and fiscal policy, told reporters.

Some economists have warned that Asia's largest economy may be on course to recession due to a strong yen against the dollar and slowing demand for Japanese products in the United States, which has been hit by mortgage loan woes.

But the ministry said spending by Japanese households in December jumped 2.2 per cent in real terms from a year earlier to an average 351,667 yen (S$4,676), far above market forecasts.

The increase was mainly due to higher spending on durable goods, such as flat TVs and personal computers, it said.

'While consumer confidence has deteriorated sharply, actual consumption seems to be holding up reasonably well,' noted Lehman Brothers economist Hiroshi Shiraishi.

'That said, it is difficult to envisage sustained solid growth in consumption without a further improvement in the employment and wage picture,' he added.

Economists had forecast a 0.2 per cent decline in household spending for last month, following a 0.6 per cent fall in November.

Household spending is a key indicator for personal spending, which accounts for more than 50 per cent of Japan's gross domestic product but has lagged behind exports in fuelling overall growth.

'Spending is expected to be in the positive territory for the rest of this year partially due to growing demand for TVs and other electronics products ahead of the Beijing Olympics,' said Daiwa's Hashimoto.

The government also said retail sales in Japan rose 0.2 per cent in December from a year earlier, the fifth straight year-on-year gain, due to increased spending on fuel because of higher gasoline prices.

Macquarie Securities economist Richard Jerram said the raft of data had eased concerns of a recession in Japan as the economy was likely to have recorded positive growth in the fourth quarter of 2007. -- AFP