Japan's unemployment rate unexpectedly fell from 4.8 per cent to 4.6 per cent last month, the first drop in 10 months, the government said yesterday.

Economists welcomed the improvement as a sign that the economy was finally recovering from last year's long recession. It prompted heavy buying by foreign investors, pushing the Nikkei 225, the key stock market indicator, up 0.98 per cent to 17,782.79, its highest closing level for 20 months.

But the government moved to dampen optimism by saying the data appeared to be distorted by seasonal and other statistical factors. "I don't think this is a sign of the situation improving," said Mr Kiichi Miyazawa, the finance minister.

Other data released yesterday suggested that any economic improvement was patchy. Industrial production, for example, dropped 0.7 per cent from April to May, even though industrial shipments showed an unexpected rise of 1 per cent

The unemployment data also showed some weak spots: the ratio of job offers to job seekers, for example, was 0.46, its lowest level since records began in 1963. These contradictory signals are causing confusion in the markets at a critical time for the Japanese economy.

The government startled investors earlier this month by releasing data that showed the economy expanded at an annualised rate of 7.9 per cent in the first quarter. This prompted some foreign investors to raise their weighting in Japanese equities.

A Reuters survey this week suggests some European fund managers are now overweight in Japan, compared with global benchmarks - a sharp contrast to their underweight positions last year.

The Bank of Japan and Ministry of Finance have denied reports that upbeat gross domestic product numbers were manipulated, but many economists suspect seasonal factors could have distorted the GDP data.

The Economic Planning Agency yesterday said seasonal swings had affected the labour market data, which were also flattered by the rising number of women now categorised as "outside" the workforce.

The unemployment rate among households' main wage earners actually rose to 3.6 per cent, from 3.4 per cent, a record high. The overall number of jobless rose to 3.34 million, also a post-war record.