Unemployment in Japan surged to a post-war high in July and prices fell at a record pace, threatening to undermine a nascent recovery for the world's second-largest economy.

The jobless rate hit 5.7%, or 3.59 million, the highest since the Second World War and worsening from 5.4% in June, said the ministry of internal affairs and communications today. The previous record was 5.5% in April 2003. Concerns about deflation intensified amid the jobs market worries with consumer prices tumbling 2.2% from a year earlier.

It was a blow to Prime Minister Taro Aso on the eve of an election that polls indicate his ruling Liberal Democrat Party will lose.

“The economy is the key factor for the election,” said Masamichi Adachi, senior economist at JPMorgan Chase in Tokyo. “Voters naturally direct their frustrations about the slumping economy at the incumbent government.”

Japan's economy climbed out of a year-long recession in the second quarter, expanding by 3.7%. But economists note exports served as the main driver of growth and domestic demand remains fragile.