Corporate pessimism over the economy grew in the July-September quarter, overshadowing a 2.3 percent rise in capital spending during the April-June period.

April-June spending rose to 9.24 trillion yen, marking the sixth consecutive year-on-year gain, the Finance Ministry said Wednesday in its quarterly survey.

But manufacturers' sales and pretax profits fell for the first time in eight quarters, ending a two-year expansion and confirming the stagnant state of Japanese industry.

Meanwhile, corporate investment in plants and equipment rose due to a time lag between the firms' plans to invest and the execution of those plans, a ministry official said.

Given the ongoing pessimism about the state of the economy, capital spending will probably drop during the current quarter.

The business sentiment poll, conducted in August, shows that the gloomy outlook has spread to companies of all sizes and categories.

The business sentiment index for large firms, defined as those capitalized at 1 billion yen or more, came to -17.5 for the July-September quarter, worse than the -12.4 projected three months ago.

The index for midsize firms, defined as those capitalized at between 100 million yen and 1 billion yen, registered -25.4 for the July-September quarter. Small firms, capitalized between 10 million yen and 100 million yen, logged -37.8.

Both worsened from the previous survey, conducted in May.

The index, which covers all business sectors other than finance and insurance, represents the difference between the percentage of firms reporting improved business conditions and those reporting a deterioration.

However, companies of all sizes said they see somewhat better prospects for upcoming quarters.

The capital spending rise in the April-June quarter was led by manufacturers, which registered a 10.5 percent year-on-year rise for the fifth quarter of increase to 3.32 trillion yen, the survey showed.

Machinery makers posted a gain of 21.8 percent, while makers of information technology-related equipment posted a gain of 17.8 percent.

In contrast, nonmanufacturers reduced capital spending by 1.8 percent to 5.91 trillion yen, the second consecutive quarterly year-on-year decrease. Real-estate businesses posted a 35.1 percent decline.

The capital spending figures will be used to help calculate the gross domestic product for the same quarter, to be released Friday.

In the latest survey, 24,729 randomly selected firms with capitalization of 10 million yen or more, excluding those in the financial sector, were queried.

The combined sales of manufacturers and nonmanufacturers in the quarter came to 318.18 trillion yen, up 1.3 percent from a year earlier and the seventh consecutive quarter of increase, the survey said.

Sales by manufacturers fell 1.6 percent to 92.67 trillion yen, due mainly to sales of IT-related electric machinery manufacturers, which shrank 4.1 percent.

Nonmanufacturers' sales posted a 2.5 percent year-on-year rise to 225.5 trillion yen, more than offsetting the decrease from manufacturers, the official said.

The survey shows that the combined pretax profits of both sectors were up 1 percent from a year earlier to 9.19 trillion yen, marking the 10th consecutive quarter of increase. While manufacturers registered a 21.2 percent decrease in pretax profits, nonmanufacturers posted a 17.1 percent rise.

Firms that saw their profits shrink from the previous year include manufacturers of steel, food products and electric machinery. Nonmanufacturers such as electric power companies and those in the construction and transport sectors also posted lower profits.

In fiscal 2000, overall capital investment rose 8.6 percent from the previous fiscal year, while sales improved by 3.7 percent and pretax profits by 33.2 percent, the ministry said.