Markets had expected the July unemployment rate to remain flat at 3.7 percent.
The jobless rate had hit 3.5 percent in May, the lowest since late 1997.
A separate survey from the labour ministry showed the ratio of job offers to job seekers stood at 1.10 in July, meaning there were 110 job offers for every 100 job hunters.
It remained flat from the previous month, the highest rate since June 1992, according to the labour ministry.
The rise in joblessness suggests more people have started seeking work as they see the labour market improving, leading them to be counted as job-seekers, which pushes up the unemployment rate.
The internal affairs ministry also said household spending fell 5.9 percent year-on-year in July.
Household spending slipped 3.0 percent in June, 8.0 percent in May and 4.6 percent in April.
The consecutive months of decline followed the nation's first sales tax hike in 17 years.
The tax was raised to 8.0 percent from 5.0 percent on April 1 in a bid to help shrink Japan's mammoth national debt, one of the heaviest burdens among wealthy nations.