Capital spending by Japanese manufacturers fell 2.7 percent in the July-September quarter compared with a year earlier as the global economic slowdown, especially in information technology, depressed prospects for growth, a Finance Ministry survey showed Wednesday.

Despite the drop, the first in 1 1/2 years, corporate investment in plants and equipment on an all-industry basis managed to edge up 0.5 percent, the ministry said.

Capital investment in all industries for the quarter totaled 10.72 trillion yen, marking the seventh consecutive year-on-year gain. But overall sales and pretax profits fell in the quarter as the effects of the ongoing economic slowdown hit Japan.

A ministry official attributed the 0.5 percent gain in overall capital spending to the time lag between the firms' plans to invest in plants and equipment and the execution of those plans. In this regard, the fallout from the Sept. 11 attacks in the United States was not reflected in the capital spending figures for the third quarter, the official said.

Corporate pretax profits plunged 32.5 percent to 5.98 trillion yen compared with a year earlier for the first fall in 11 quarters, while sales fell 2.3 percent year-on-year to 327.18 trillion yen.

The latest survey covered 23,921 randomly selected firms with capitalization of 10 million yen or more, excluding those in the financial sector.

In a separate report issued by the ministry the same day, business confidence was shown to have worsened in the October-December quarter following the Sept. 11 attacks.

Given the current pessimism about the state of the economy after Sept. 11, capital spending is expected to drop further during the next quarter.

The small gain in overall capital spending came as spending by nonmanufacturers rose 2.4 percent to 6.91 trillion yen over the previous year, the first increase in three quarters.

In contrast, spending by manufacturers fell 2.7 percent to 3.8 trillion yen as the ongoing information technology slump impacted electric machinery makers, the official said.

The capital spending figures will be used to help calculate the gross domestic product for the July-September quarter, which will be released on Friday.

The business sentiment poll meanwhile showed 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 minus 28.5 for the October-December quarter, worse than the minus 9.5 projected three months ago.

The index for midsize firms, defined as those capitalized between 100 million yen and 1 billion yen, registered minus 30.9, while small firms, capitalized between 10 million yen and 100 million yen, logged minus 41.1. Both worsened from the previous survey.

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.