Sept. 8 (Bloomberg) -- Lending growth at Japanese banks slowed in August for an eighth straight month as companies cut spending and unemployment hit a record high.

Loans, excluding those by credit associations, rose 1.9 percent from a year earlier, compared with 2.2 percent in July, the Bank of Japan said today.

Loan demand remains muted as companies cut back spending amid a slump in sales and deflation threatens the nation’s fledgling economic recovery. Japan’s largest banks including Mitsubishi UFJ Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. are trying to offset falling loan income by garnering fees by buying or merging with brokerages.

Lending by Japan’s 10 so-called city banks, including Mizuho Financial Group Inc. and Mitsubishi UFJ, rose 0.9 percent in August after gaining 1.2 percent in July. Regional banks expanded lending 3 percent, compared with 3.2 percent in the previous month.

Japan’s unemployment rate rose to a record 5.7 percent in July and consumer prices dropped an unprecedented 2.2 percent from a year earlier, the government said last month. The nation’s economy expanded at an annualized 3.7 percent pace in the three months to June 30, the first growth in five quarters, following an 11.7 percent decline in the first three months of the year, the cabinet office said on Aug. 17.

“Companies’ demand for operating and capital expenditure funding remains weak,” Seiichi Shimizu, associate director-general at the Bank of Japan’s bank surveillance department, said at a briefing in Tokyo. “Firms are holding onto cash they obtained through the spring in the form of deposits.”

Mitsubishi UFJ, the country’s largest bank by market value, fell 2 percent to 542 yen as of 9:41 a.m. in Tokyo, while Sumitomo Mitsui, the second-largest, declined 2.4 percent.

To contact the reporter on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net

Last Updated: September 7, 2009 20:51 EDT