Sept. 20 (Bloomberg) -- Japan's manufacturers are confident the economy will recover from last quarter's contraction, a government survey showed.

Sentiment among manufacturers with at least 1 billion yen ($8.6 million) in capital rose to 7.7 points this quarter from minus 2.2 points in the previous three months, according to a survey released by the Cabinet Office and Ministry of Finance today. A positive number means optimists outnumber pessimists.

The result indicates that the Bank of Japan's more widely watched Tankan business confidence survey may not deteriorate next month as expected. It also shows Japan's businesses are confident that the world economy will withstand the effects of a collapse in the U.S. subprime mortgage market.

``This number suggests that companies think the global economy can muddle through,'' said Hiromichi Shirakawa, chief economist at Credit Suisse Group in Tokyo and a former Bank of Japan official. ``The improvement in sentiment suggests that the Tankan will be sort of flattish -- but that's better than the market expectation.''

The quarterly Tankan, scheduled for release on Oct. 1, will probably show that sentiment fell to 22 from 23, according to the median estimate of 14 economists surveyed by Bloomberg News.

The yen traded at 115.91 per dollar at 11:49 a.m. in Tokyo from 115.99 before the survey was published.

Confidence among all businesses rose to 6.2 points this quarter from minus 0.9 points, the government said. Companies were pessimistic in the second quarter for the first time since the current survey began in 2004.

BOJ's Fukui

Bank of Japan Governor Toshihiko Fukui said yesterday that although the U.S. housing recession has increased risks for the economy, there's no need to alter the bank's view that growth there will return to its potential.

The central bank, which held the key overnight lending rate at 0.5 percent yesterday, maintained that Japan's economy is ``expanding moderately.''

Companies plan to spend more on factories and equipment in the year ending March, today's survey showed. Manufacturers aim to boost capital spending 6.3 percent and companies sampled from all industries will step up investment 1.5 percent.

The world's second-largest economy shrank an annualized 1.2 percent in the second quarter as businesses cut investment. Fukui said yesterday that the drop in spending was temporary.

The Tankan has moved in step with the government survey for 10 of the past 14 quarters, Bloomberg data show. Unlike the Tankan, which measures the level of confidence, today's survey examines the degree of change in sentiment from the previous quarter.

The Bank of Japan is surveying companies through the end of this month, making the Tankan Japan's most current gauge of business confidence. The government gathered most of its responses for today's survey at the end of August.

To contact the reporter on this story: Lily Nonomiya in Tokyo at lnonomiya@bloomberg.net

Last Updated: September 19, 2007 22:50 EDT