Japanese business confidence has improved for a second straight quarter as the world's number two economy slowly emerges from its worst recession in decades, according to the Bank of Japan.

But the mood among corporate executives remains generally gloomy and profits and business investment are expected to slump this year, highlighting the bumpy recovery path facing Japan's export-dependent economy.

Sentiment among major manufacturers improved to minus 33 in September from minus 48 in June, after hitting a record low of minus 58 in March, according to the central bank's closely watched Tankan survey of more than 10,000 firms.

The index measures the percentage of firms that think business conditions are good minus those that believe they are bad, so the mood remains cautious.

"Clearly the economy is recovering, driven by the rebound in the manufacturing sector," said Hiroshi Shiraishi, an economist at BNP Paribas.

"But there's a lot of slack in the economy so companies are still quite cautious about their planned investment and hiring."

The profit outlook remains bleak. The major makers forecast a 38.9 percent drop in pre-tax earnings for the current financial year to March, after a 61.9 percent plunge last year.

Large manufacturers plan to slash their spending on plants and equipment by 25.6 percent in the year through March 2010 compared with the previous year, according to the Tankan survey.

"Unfortunately there are no signs that a recovery in export earnings will lead to a rebound in capital spending," said Naoki Murakami, chief economist at Monex Securities.

"It will take more time to see a self-supportive economic recovery in which higher profits lead to a recovery in capital spending. Needless to say that the Bank of Japan is a long way from considering tightening credit."

But there are signs things are slowly improving. The confidence index for major non-manufacturers rose to minus 24, from minus 29 three months earlier.

The Tankan also found that big manufacturers expect sentiment to continue to improve, forecasting a sentiment rating of minus 21 for December.

Japan's corporate sector, particularly major manufacturers such as Sony and Toyota, were a key driver of growth in Asia's largest economy before the global economic crisis erupted.

Now many companies are cutting back their investment in an effort to ride out the economic downturn, which battered their sales and sent the yen soaring against other major currencies, eating away at their profits.

Japan's economy grew in April-June for the first time in five quarters, but the unemployment rate is at a record high and deflation is deepening amid weak domestic demand, while a strong yen is threatening exports.

The yen hit an eight-month high of 88.25 per dollar on Monday. The major manufacturers' earnings forecast is based on the assumption that the dollar will average 94.50 yen during this fiscal year.

On Thursday the greenback was changing hands for 89.84 yen, suggesting that exporters may have to downgrade their outlooks unless the dollar strengthens.

The Organisation for Economic Cooperation and Development predicted on Wednesday that Japan's economy would grow by 0.9 percent in 2010, after a huge 6.0 percent contraction this year.