The capex data comes at a time of uncertainty both at home and abroad in the wake of the U.S. subprime mortgage crisis, which forced the Bank of Japan to drop its bias towards raising interest rates and assume a neutral stance.
The figure, which comes on the heels of recent bleak reports on industrial output and household spending amid rising inflation, is used to calculate revised gross domestic product for the quarter due out on June 11.
Preliminary data showed Japan's economy grew 0.8 percent in January-March, or an annualized 3.3 percent, as exports weathered a U.S. downturn, but firms cut capital spending by 0.9 percent from the previous quarter -- the first such drop in three quarters.
"We still have to look at inventory figures, but given the capital spending figure, GDP for the first quarter may be revised upward," said Kyohei Morita, chief economist at Barclays Capital Japan. "Still, I expect an economic contraction in April-June, so this capital spending figure won't change our view on the economic outlook."
All firms' capital spending fell 4.9 percent from the same quarter a year earlier, the Ministry of Finance said, better than market expectations for a 9.6 percent drop.
It was the fourth straight quarter of annual declines, following a 7.7 percent drop in October-December, which was the biggest decline since 2002.
Economists pointed to a rise in capital spending excluding software of 1.3 percent from the previous quarter as a reason behind a likely upward revision in the capex component of revised GDP.
Economists were disappointed by weak sales and profits in the finance ministry survey, maintaining the view that Japan's economy is slowing in the current quarter despite brisk GDP figures in January-March.
"Sales and recurring profits were pretty bad. Although GDP growth accelerated in January-March, today's corporate data suggests that we shouldn't take GDP at face value," said Takahide Kiuchi, chief economist at Nomura Securities.
Capital spending has been a main engine for the world's No.2 economy which is in its longest growth cycle in the postwar era.
But business expenditures are showing signs of losing steam with companies feeling the pinch from surging energy and raw materials costs and facing risks of a pronounced slowdown in the United States -- a main destination for Japanese exports.
A slowdown in Japanese corporate activity may further undermine the BOJ's case that corporate sector strength will spill over to households.
Japanese personal consumption, which accounts for more than half of the economy, has been lackluster with consumer sentiment sliding amid stagnant wages and food price hikes while the job market stalls.
The BOJ dropped its bias towards monetary tightening in April, saying it was inappropriate to predetermine policy direction given high uncertainty.
Market players expect the BOJ to keep the overnight call rate target at 0.5 percent for now but raise it next year. The central bank last raised rates in February last year -- several months before the subprime crisis erupted in the United States.