Japanese bank lending marked its biggest annual fall in nearly five years in May, falling 2 percent as companies remained wary of boosting capital spending even as the economy recovers and the central bank keeps monetary policy loose.

The declines in recent months have been exaggerated by a comparison with strong fund demand a year ago, when companies were still relying more than usual on bank lending in the aftermath of the global financial crisis.

Even so, companies are in no mood to increase lending now with market jitters over the European debt crisis and the yen's gains against the euro clouding the outlook, analysts say.

Declines will likely moderate from June onwards. Still, companies are still focused more on trimming debt, so I don't think fund demand will pick up any time soon, said Takeshi Minami, chief economist at Norinchukin Research Institute.

The euro's weakness and uncertainty about overseas economies may make companies even more hesitant to borrow for capital spending.

The fall in bank lending in May from a year earlier was the sixth straight month of decline and the biggest drop since July 2005, the Bank of Japan said on Tuesday.

The euro hovered near an 8-1/2-year low against the yen hit on Monday as markets continued to fret over Europe's banking system woes.

The Bank of Japan has kept interest rates near zero and outlined last month a new loan program aimed at encouraging commercial banks to lend more to industries with growth potential.

It is expected to announce details of the scheme at its policy-setting meeting next week or in July at the latest.

But analysts say the program is unlikely to do much to boost bank lending.

The measure the BOJ is considering will not be a real solution. It's conceived essentially to cooperate with the growth strategy the government plans to announce this month. The steps alone will not do much to boost lending, said Junko Nishioka, chief Japan economist at RBS Securities.

Japan's new leader Naoto Kan unveiled a new cabinet lineup on Tuesday after the abrupt resignation of his predecessor last week.

The new government is set to outline details this month of its strategy to boost the economy by supporting new areas of growth such as the environment, healthcare and tourism.

Japan pulled out of recession in April-June last year, helped by a rebound in exports to Asia and firm consumption supported by a government stimulus package.

An index of coincident economic indicators, a gauge of current conditions, rose in April to mark the 13th straight month of gains, the Cabinet Office said on Tuesday.

The number of bankruptcies also fell to a 4-1/2-year low in May, a research firm said on Tuesday, reflecting improvements in the economy.

But service sector sentiment fell in May for the first time in six months, a government survey showed, underscoring the fragile state of the economy.

(Additional reporting by Hideyuki Sano, writing by Leika Kihara)

Japan Fall