Sept. 4 (Bloomberg) -- Japanese businesses cut spending for a ninth quarter as the global recession squeezed profits, underscoring the challenge for the incoming government to sustain a recovery from the country’s worst postwar slump.

Capital spending excluding software fell 22.2 percent in the three months ended June 30 from a year earlier, after dropping a record 25.4 percent in the previous quarter, the Finance Ministry said today in Tokyo. Profits slid 53 percent.

Sales fell 17 percent, the second-biggest drop on record, indicating global demand hasn’t recovered enough to encourage companies to buy more plant and equipment. Sanyo Electric Co. and Seven & I Holdings Co. are among businesses scaling back.

“Companies have too many resources, and until that situation changes, they won’t have to invest in more equipment and they won’t need to hire more people,” said Seiji Shiraishi, chief economist at HSBC Securities Japan Ltd. in Tokyo.

The government will use today’s report to revise gross domestic product on Sept. 11. Preliminary figures showed the world’s second-largest economy grew an annualized 3.7 percent in the three months ended June, the first expansion in five quarters. Shiraishi said today’s numbers may result in a “slight upward revision” to the capital spending component.

The Nikkei 225 Stock Average fell 0.2 percent at the morning close in Tokyo. The yen traded at 92.63 per dollar from 92.70 before the report was published.

May Divert Stimulus

The Democratic Party of Japan won power for the first time in the Aug. 30 general election, ousting the Liberal Democratic Party, which governed Japan for all but 10 months since 1955. Hirohisa Fujii, a DPJ lawmaker and possible contender to become finance minister, said yesterday that the incoming government may redeploy as much as 5 trillion yen ($54 billion) from “wasteful” stimulus projects into programs that support households and workers.

Manufacturers cut spending by a record 32.8 percent from a year earlier, today’s report showed. Service companies reduced investment by 14.3 percent.

“The worst may be over for corporate profits, but levels are still low,” Economic and Fiscal Policy Minister Yoshimasa Hayashi told reporters in Tokyo today. “Firms continue to restrain capital spending.”

Sanyo Electric, the world’s largest maker of rechargeable batteries, said last month it will close parts of its air- conditioner and light-emitting-diode businesses and give incentives for workers to retire. Seven & I, Japan’s biggest retailer, cut its profit forecast 11 percent this week and said it may close 20 Ito-Yokado stores.

Production Revival

Factory production rose for a fifth month in July from June as global stimulus and inventory restocking boosted demand. Manufacturers are still producing 22.9 percent less than a year ago, and July’s output gain was the slowest in four months.

“We’re finally starting to see improvements in production, but the level remains very low,” said Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “We need to see greater improvements in production before companies begin to increase their investments.”

Machinery orders rose for the first time in four months in June, and some economists forecast a rebound in capital spending as early as next year.

“By next year’s second quarter, I expect companies will have extra cash” as earnings improve, said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo. “Companies need to invest these profits on things that will make production more efficient.”

HSBC’s Shiraishi said earnings won’t return to a level that allows manufacturers to buy new equipment until 2012 because they currently have too much capacity. “Despite the temporary boost with the stimulus, consumer spending is unlikely to rise for some time,” he said.

Households cut spending at the fastest pace in five months in July and wages slumped for a 14th month. The unemployment rate reached a postwar high, and economists surveyed by Bloomberg News forecast it will continue rising into next year.

To contact the reporters on this story: Aki Ito in Tokyo at aito16@bloomberg.net; Keiko Ujikane in Tokyo at kujikane@bloomberg.net

Last Updated: September 3, 2009 22:21 EDT