* Q2 capex up 5.6 pct yr/yr vs +7.3 pct in Q1
* Seasonally adjusted capex down 2.7 pct qtr/qtr
* Recurring profits up 23.8 pct yr/yr
* Economics Minister say capex recovery weak (Adds quotes, policy context, details)
By Leika Kihara
TOKYO, Sept 1 (Reuters) - Japanese firms spent less on plant and equipment in April-June than in the previous quarter despite reaping record profits, a sign premier Shinzo Abe's stimulus policies have failed to spur new investment key to ending nearly two decades of deflation.
Fears of a sharp slowdown in China and the recent market sell-off may further dampen companies' spending appetite and hurt Japan's fragile recovery, analysts say.
Corporate spending on plant and equipment rose 5.6 percent in April-June from a year ago, slowing from a 7.3 percent gain in the first quarter, government data showed on Tuesday.
Excluding spending on software, capital expenditure fell a seasonally-adjusted 2.7 percent from the previous quarter after jumping 6.0 percent in January-March, marking the biggest fall in three years.
The slower spending by firms maintains pressure on policymakers to top up stimulus as persistent weakness in private consumption and exports add to worrying signs of a worsening slowdown in China, which have sent global markets into a tailspin in recent weeks.
"The corporate sector remains in good shape with falling oil costs and the weak yen driving up profits," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
"But companies may postpone spending plans if exports remain weak. With the economy at a standstill, the Bank of Japan may be forced to ease monetary policy in October," he said.
Given the slowdown in capital spending, many analysts expect April-June economic growth to be slightly downgraded when revised figures are due Sept. 8.
A preliminary estimate showed the world's third-largest economy contracted an annualised 1.6 percent in April-June on soft exports and consumption.
Analysts expect any rebound in growth in the current quarter to be modest, partly as sluggish Asian demand weighs on exports.
Policymakers are clinging to hope that capital expenditure will serve as a driver of Japan's recovery, but some lawmakers are already calling for additional fiscal or monetary measures to stoke growth.
Deploying further stimulus, however, may do little to help with companies continuing to hoard cash instead of spending.
Corporate recurring profits rose 23.8 percent in April-June from a year earlier at 20.3 trillion yen ($168 billion), the highest level on record, the data showed.
"I think capex is still in recovery, but in light of the record profits that companies have seen, you can say the recovery is still weak," Economics Minister Akira Amari told reporters after the data's release.
$1 = 120.6400 yen Additional reporting by Stanley White; Editing by Shri Navaratnam