Yamazaki Makiko

TOKYO (Reuters) - The first-quarter record of Japanese companies' investments in plants and equipment was led by an industry focused on domestic demand, but key export sectors reduced spending, indicating that U.S. tariffs are undermining business confidence.

Capital expenditure rose 6.4% to 18.8 trillion yen ($130 billion) from January to March 3, according to the Finance Department. Previous records were set in 2007.

But business investment has been mottled, down 0.2% in the last quarter, marking the first decline in nearly four years.

Capital expenditure rose 1.6% in the quarter based on seasonal adjustments.

“Capital expenditure is driven by sectors that benefit from domestic sales due to rising prices or inbound tourism (such as hotel construction)," said Takeshi Minami, chief economist at Norinchukin Research Institute.

Spending in the food industry climbed 13%, while spending in the real estate sector increased 11%. However, it means that spending in the automotive industry fell by 1.4%, while spending by factory equipment manufacturers fell by 4.1%.

"The tariff threat has put some of these companies cautious about new investments after Trump's victory in November," Minami said.

He added that the data is unlikely to have a significant impact on the GDP revised on June 9.

Preliminary GDP data from last month showed that Japan's economy grew at 0.7% annually in the first quarter, shrinking for the first time in the year due to stagnant consumer spending and a decline in exports.

Capital expenditure has generally been strong in recent years due to the critical scale of domestic demand-led economic growth as companies spend information technology to offset the long-term labor austerity generated by the country’s rapid age population.

Rising corporate profits support light spending. Data on Monday showed that company sales in the first quarter increased by 4.3% from the same period last year, while frequent profits rose by 3.8%.

But U.S. tariffs threaten automakers and other export-oriented Japanese companies that form the backbone of the economy.

Trump imposes a 10% tariff on most imports to the U.S. and also imposes a 25% tariff on cars, steel and aluminum.

Unless a deal can be reached with Trump, Japan will also face a tariff rate of 24%.

According to an estimate by the Japanese Institute, if all threatening tariff measures to Japan take effect, U.S. combined exports would drop as much as 6 trillion yen per year, reducing corporate profits by as much as 25%.