Mitsubishi Heavy Industries, the company behind the new SpaceJet, is cutting its budget for the project.
Long-delayed, the Mitsubishi SpaceJet has missed six delivery deadlines going back to 2013.
Test flights in the US were suspended this year due to the virus pandemic.
Mitsubishi Heavy Industries said on Friday it would freeze development of its SpaceJet regional jet to bolster other parts of its business.
The company posted a 62.5% fall in its second quarter operating profit.
The SpaceJet suspension will help it lower costs by 120bn yen (£900m), the company said.
The decision to cut back on funding was prompted by the downturn in the airline industry brought on by coronavirus travel curbs.
Airlines around the world have been forced to shrink operations to survive.
While Japan has seen some rebound in domestic demand helped by government travel subsidies, international travel is still a fraction of what it was before the outbreak.
Japan’s biggest carrier ANA Holdings was due to be the new plane’s first customer.
Mitsubishi Heavy Industries is a key supplier to commercial aircraft makers Boeing and Airbus who dominate the industry.
The Japanese government encouraged the SpaceJet programme in a bid to establish itself as a global commercial plane maker.
“Airbus and Boeing have global reach. This is critical in terms of after sales service and maintenance support,” said airline industry consultant John Strickland.
“It’s difficult for others to attempt to replicate this.”
China also has ambitions to be a major planemaker with Commercial Aircraft Corporation of China (Comac).