More Japanese found work in June, bringing down the jobless rate to 5.3 per cent for the first improvement in three months, but weak retail sales tempered optimism that the economy was on the mend.
The government's unemployment data was better than expected in a Reuters poll last week of 20 economists, whose median forecast was a 5.4 per cent jobless rate, the same as May.
The number of employed, including self-employed, was up 380,000 year-on-year at 64.11 million, rising for the second straight month and prompting some economists to argue that economic conditions had, at the very least, stopped deteriorating.
"I think we can say conditions have stabilised," said Mr Mizuho Research Institute economist Yoshimasa Maruyama.
The rate compared with a record-high 5.5 per cent last seen in January.
The data was also good news for Prime Minister Mr Junichiro Koizumi, who is set for a ruling party election in September amid criticism his economic policies were failing.
"Finally, our reforms are bearing fruit," he told a news conference, adding he was not planning changes to his current policies.
Finance Minister Mr Masajuro Shiokawa added to the optimism by forecasting firmer-than-expected growth in gross domestic product for the current fiscal year through next March. "I think GDP could be slightly better than the forecast this year," he said. The government had projected growth of 0.6 per cent.