The average daily balance of Japanese bank lending fell 1.7 percent in January from a year earlier to 401.57 trillion yen (4.51 billion U.S. dollars), the Bank of Japan said in a report on Monday.

After adjustment for special factors, the loan balance fell to 1.4 percent.

The balance, excluding loans by small cooperative financial institutions was adjusted for special factors including loan securitization, exchange rate fluctuations and the allocation of loan-loss reserves.

Outstanding loans held by Japanese banks dropped in January from a year earlier as companies facing excess capacity and a bleak economic outlook hesitated to borrow for capital investment, economists indicated.

The Bank of Japan, in a bid to fight deflation, decided on Dec. 1 to offer banks more short-term funds, but the cash is not spreading through the economy as corporate fund demand remains weak.

A slow down in bank lending may suggest that big companies are raising funds in capital markets, rather than relying on banks, or that despite the easing of banks' lending attitude, the low demand reflects a low interest in increasing capital expenditure, economists said.

The world's second-biggest economy has been growing since the second quarter of last year on the back of exports, particularly to China, thanks to domestic and global stimulus measures.

However, the recovery in exports has not spilled over to domestic demand, as many firms grappling with excess capacity and are refraining from capital spending, while consumers have tightened their belts amid falling wages, and a harsh employment environment, fueling concerns about deflation.