Finance Blog number 1

Lawmakers grilled Toyota’s president, Akio Toyoda, in a hearing Wednesday aimed at discovering, among other things, why the automaker was slow to respond to safety issues related to sudden acceleration.

Mr. Toyoda acknowledged that the company had made mistakes and repeatedly apologized for the recent lapses in quality control. But he did not provide specific answers to questions about what the company knew about certain defects and when they were discovered.

Members of the House Committee on Oversight and Government Reform repeatedly asked Mr. Toyoda if his company had provided U.S. safety regulators with all the information they requested.

"According to my understanding, we fully shared the information we have with the authorities," Mr. Toyoda said, speaking through a translator.

Mr. Toyoda, who is the grandson of the company’s founder, read his opening remarks in English, but relied on a translator for the majority of his testimony. Yoshimi Inaba, the president of Toyota’s North America division, testified before the committee in English.

Committee members also peppered the executives with questions about why Toyota didn’t respond faster to customer complaints about sudden unintended acceleration.

In response, Mr. Toyoda acknowledged that the company’s efforts failed to live up to its core values and pointed to the company’s plans to set up a global commission to address complaints more quickly and efforts to increase transparency on safety issues.

However, some lawmakers did not find Mr. Toyoda’s answers sufficient.

Marcy Kaptur, D-OH, said she was "disappointed" with Mr. Toyoda’s testimony, adding that she did not feel he had shown sufficient remorse or taken enough note of the amount of complaints over the last decade.

The executives also came under fire for a 2009 memo in which Toyota staffers boasted of the company saving $100 million by negotiating a limited recall for certain cars.

Mr. Inaba, whose name appeared on the document, said the it was "inconsistent with the guiding principle of Toyota." He added that the report was made shortly after he rejoined the company and that he was not involved in writing it.

Toyota has been criticized for not responding quickly enough to customer complaints about sudden acceleration, which have been blamed for several accidents resulting in injuries or death. The automaker has recalled over eight million vehicles worldwide for this problem.

Mr. Toyoda attributed instances of unintended acceleration to certain factors, including the way the car is used or misused, and other "structural aspects." But he said he was "absolutely confident" that there are no defects with the design of Toyota’s electronic throttle control system.

After the nearly three hour hearing was over, Mr cash advance to savings account. Toyoda told reporters that he plans to make "sweeping changes" at the automaker.

"Going forward I intend to make every effort to achieve the transformation and rebirth of the company by making safety and ‘customer first’ the top priority," he said.

In response to the human toll of the company’s safety problems, Mr. Toyoda extended his condolences to members of the Salyor family, who lost four members in a crash involving a recalled Toyota vehicle in San Diego.

"I would like to send my prayers again," Mr. Toyoda said. "And I will do everything in my power to ensure that such a tragedy never happens again."

However, when asked if Toyota would pay for the medical or funeral expenses for drivers killed or injured in crashes involving defective Toyota cars, the executives hedged.

Mr. Inaba said the question will be resolved by the company’s legal team.

In his prepared remarks, Mr. Toyoda said the automaker’s rapid growth over the last few years contributed to the recent lapses in safety and outlined new steps the company will take to ensure quality control.

Toyota will devise a system to convey customer complaints from around the world to the company’s management in a timely manner, he said. It will also implement a system in which each region will be able to make recall decisions as necessary.

In addition, Toyota form a "quality advisory group" that Mr. Toyoda said will be "composed of respected outside experts from North America and around the world to ensure that we do not make a misguided decision."

Mr. Toyoda, who became the company’s president in June, said the automaker will "invest heavily" in quality in the U.S. and will establish an Automotive Center of Quality Excellence and will introduce the new position of Product Safety Executive.

Toyota has grown its sales in recent years, outpacing General Motors (GM, Fortune 500) as the world’s top-selling automaker. But its recent troubles have stained its reputation as a bright light in Japan’s otherwise stagnant economy.

Prior to Mr. Toyoda’s testimony, Department of Transportation secretary Ray LaHood testified before the House Oversight and Government Reform Committee. He defended himself against criticism for not having taken enough action concerning the faulty vehicles.

"We haven’t been sitting around on our hands," said LaHood. "When there needs to be a recall, we do it."

Aaron Smith, CNNMoney.com staff writer contributed to this report 

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Sun Hung Kai Properties Ltd., the world’s biggest developer by market value, won Hong Kong’s first land auction of the year with a bid that exceeded most analysts’ estimates after selling 900 homes over the weekend as demand for property in the city surges.

The shares closed 2 percent higher after the developer paid HK$3.37 billion ($434 million) for the site in the eastern Tseung Kwan O district. The company raised HK$4.2 billion in a weekend apartment sale that attracted 120,000 prospective buyers in the city of 7 million.

The land auction and the weekend sale fanned speculation a bubble is forming in Hong Kong’s housing market, where home prices surged 29 percent in 2009 as low interest rates and an increase in buying by mainland Chinese stoked demand. Norman Chan, chief executive of the Hong Kong Monetary Authority, told lawmakers Feb. 1 that the city faces a “huge” potential risk of bubbles forming in its asset markets given high liquidity.

“The outcome is positive for the Hong Kong property market,” said Eva Lee, a Hong Kong-based property analyst at Macquarie Securities Ltd. “People expect 2010 won’t be an easy market given the strong growth last year, but the auction has reinforced their confidence.”

Sun Hung Kai spokeswoman Brenda Wong confirmed the company made the winning bid today. Price estimates for the auction ranged from HK$2.6 billion to HK$3.4 billion, and the median projection of five analysts Bloomberg News surveyed by phone and e-mail was HK$2.9 billion.

‘Reasonable’

Hong Kong is trying to ease a shortage in land supply and new properties that developer Cheung Kong (Holdings) Ltd. said last month may help raise home prices by as much as 20 percent this year.

Sun Hung Kai paid a “reasonable” price for the site, Victor Lui, executive director of Sun Hung Kai’s real estate broker, said by phone today. The price paid was “higher than expected but reasonable,” he said, adding he is “positive” about the outlook for the property market.

Sun Hung Kai plans to invest HK$6.5 billion on the plot of land in a medium-sized residential project, which may take between three and four years to complete, Lui said.

The developer at the weekend sold 900 apartments at the Yoho Midtown apartment complex in northwestern Yuen Long district for an average HK$5,400 per square foot, Amy Teo, Sun Hung Kai project director, said. That compares with an average HK$3,000 per square foot for new homes in the area a year ago, according to Wong Leung-sing, an associate director at Centaline Property Agency Ltd.

Crowds Attracted

“All the ingredients are in place for a property bubble in Hong Kong, including low interest rates and limited supply, but I don’t think we are in one yet,” said Buggle Lau, chief property analyst at Midland Holdings Ltd. “If more speculators enter the market then it could push prices up too high.”

The city had the world’s fastest-growing major housing market last year, according to a survey compiled by real-estate agents Knight Frank LLP.

Some 120,000 prospective buyers have flocked to the show homes since Feb. 19, Teo said, speaking at the display properties set up in a shopping center near the apartment complex in the city’s New Territories. Sun Hung Kai increased the number of apartments on sale to 900 from 700 because of demand, she said. The building complex has a total of 1,890 homes, according to Teo.

About 40 units were immediately advertised for resale at asking prices of as much as 20 percent more than the original costs of purchase, the South China Morning Post newspaper reported, citing property agents.

Supply

The number of private homes completed in Hong Kong last year fell 18 percent to 7,200 units, the lowest since 1997, the government said in a report Jan. 22.

The city’s home sales more than doubled in value in January from a year earlier to HK$36.2 billion, according to figures released by the government’s land registry. Sales gained 4.1 percent last month from December, the agency said.

The authority, Hong Kong’s de facto central bank, raised deposit levels for luxury apartments in October to try to cool lending. The government also plans to raise stamp duty, or transaction tax, on homes selling for more than HK$20 million to 4.5 percent from 3.75 percent in a bid to rein in the property market, the Chinese-language Sing Tao Daily said Feb. 11.

“Government intervention could lead to higher interest rates, but I can’t see mortgage rates much above 2.5 percent this year, which is unlikely to deter some buyers,” said Midland Holdings’ Lau.

Prices may rise as much as 15 percent in the first quarter, Centaline’s Wong said. Hong Kong’s Chamber of Commerce forecasts the city’s economy may grow between 3 percent and 4 percent this year.

“Given that the U.S. is unlikely to raise interest rates sharply and the yuan is under appreciation pressure, Hong Kong property prices may have substantial growth this year, but there is also a risk of a bubble,” said Benny Wong, executive director at Hong Kong-based Pan Asian Mortgage Advisory Company Ltd. “I expect the Hong Kong government will increase land supply this year in response to the high prices.”

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Hopes that the economy can sustain its recovery drew support Wednesday from news that industrial output rose for a seventh straight month and house construction hit a six-month peak in January.

Analysts cautioned, though, that the gains could falter if consumer demand weakened.

The report on industrial production from the Federal Reserve showed gains in all three major categories: manufacturing, mining and utilities.

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China is likely to soon overtake Japan to become the world’s second largest economy, a milestone that will only fuel growing fears about the economic might of the world’s largest country.

China’s economy grew by 8.7% in 2009, even in the face of a global economic slowdown. Japan, which will report its full-year numbers on Feb. 14, is expected to slip behind China due to the steep decline in its economy in the first half of last year.

Both China and Japan are likely to end the year with a gross domestic product, the broadest measure of economic activity, of just over $5 trillion. To put that in context, that’s only a little more than a third of the size of the U.S. economy.

But with its huge population edge on the United States, many economists believe it is inevitable that China will eventually overtake the United States — even if it takes another 20 or 30 years.

"It’s kind of like the U.S. and Great Britain 125 years ago. Given how much larger we were, it was only a matter of time before we caught them," said Jay Bryson, global economist for Wells Fargo Securities. "And it’s only a matter of time before they catch us."

But there are still many limitations on China’s growth prospects. For those who are scared that the U.S. will fall behind its Chinese rivals sooner rather than later, it’s useful to think back a bit more than 20 years, when Japan was considered a similar threat to U.S. economic dominance.

John Makin, a visiting scholar specializing in Asian economies at the American Enterprise Institute, pointed out that in the late 1980s, Japan was "viewed as the unstoppable force."

Since then the Japanese economy has struggled mightily, suffering through the so-called "Lost Decade" of economic decline followed by a period of only weak growth after that.

Of course, there are differences between Japan in the late 1980s and China today. Most notably, Japan was already a fully developed economy two decades ago.

China is still an emerging economy, feeding off the growth that comes from massive public works projects designed to catch-up to the infrastructure already found in the United States, Europe and Japan, as well as consumers entering the middle class eager to buy their first car or household appliance personal business card.

Echoes of Japan’s problems. But there are plenty of similarities as well.

There are signs of a developing asset bubble in China’s housing and equity markets. China’s banking system has been dogged by questions about its transparency. There is also a dependence on exports that are supported by the government’s manipulation of the currency and limits on population growth.

All were factors in Japan’s troubles over of the last two decades.

The last year shows one of the problems with a country whose economy is greatly export driven. When the global recession hit, China’s exports were not spared, and it took about $586 billion in government spending, to fill the gap.

That turned out to be a much bigger share of China’s GDP than all the various bailouts and stimulus packages in the United States.

Lakshman Achuthan, managing director of Economic Cycle Research Institute, said China’s exports, driven by its cheap currency, makes it vulnerable to even lower-cost developing economies.

"A ‘Lost Decade’ is not an immediate issue for China, but they need to shift away from export dependence," he said.

Adding to these risks is the obvious fact that China is still a communist country where the government, rather than free markets, makes many decisions on the allocation of capital and resources. The free flow of information is also limited.

Most Western economists would argue that this it not conducive to long-term economic growth, even if government control of economic decisions can help to boost output in the short-term.

"It’s a bit like a very powerful but inefficient engine," said Makin. "They need to develop a way to allocate resources and capital that’s not driven by not a bunch of central planners." 

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Democratic leaders have told Oregon Gov. Ted Kulongoski they won’t craft legislation that would change Oregon’s kicker laws.

Kulongoski said in a release late Thursday that leaders “do not intend to refer kicker reform and an emergency reserve fund to the November ballot during this special session, or anytime this year.”

The decision means residents will continue to collect refunds when money collected in Oregon’s general fund exceeds projections the state makes every two years.

It also means a major effort to restructure the state’s revenue system, a primary Kulongoski goal, won’t happen during the governor’s term. Kulongoski leaves office Jan. 1.

Kulongoski and several lawmakers from both sides of the aisle sought to change the kicker rules in order to build state reserves, then use that money to help defray effects from recessions and economic downturns.

Critics of the kicker say that because money is returned to state residents instead schools and public safety programs face peril when Oregon’s economy goes south no fax payday loans.

Kulongoski broached kicker reform as an olive branch to opponents of two tax measures that Oregon voters passed on Jan. 26.

“This decision by legislative leadership is disappointing and a missed opportunity for the people of Oregon who strongly support using a portion of the kicker revenues to build an adequate reserve for critical services,” Kulongoski said in his statement.

Kulongoski went as far to say that kicker reform is the Legislature’s most important issue during the short session, which will end around March 1.

“Oregonians deserve the opportunity to establish an emergency reserve fund in our state constitution that will help provide fiscal stability and certainty in the state’s budgeting process,” he said. “The people of Oregon deserve better.”

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Bets against the fiscally unfit are multiplying, and there’s no telling where they will stop.

So far, Dubai, Greece, Portugal and Spain have come under attack as investors demand higher interest rates on bonds sold by cash-strapped nations. For now, few observers expect to see defaults. But rising borrowing costs alone could exact a toll on already tepid economic recoveries.

What’s more, even deeper-pocketed issuers such as the U.S. and the U.K. could be paying much higher yields by next year, as they struggle with political squabbles about rising deficits fueled by a massive price tag for bailouts and stimulus.

"It all depends on growth," said Jan Randolph, director of sovereign risk analysis at forecasting firm IHS Global Insight. "Economic growth is the great redeemer in these sorts of situations, but it’s not at all clear that we can count on seeing enough growth in a lot of the heavily indebted countries."

Borrowing costs have soared over the past two months in Greece, and this week the deficit hawks have swooped down on two other southern European nations, Portugal and Spain.

Interest-rate spreads between these countries’ bonds and those issued by Germany have widened this year, hitting record levels in Greece.

The tremors come as officials in rich countries struggle with pressures once associated with so-called emerging markets: investors demanding that governments slash spending at a time of falling tax collections, soaring debts and, in many cases, growing public unrest.

The worries in Greece, Spain and Portugal stem in part from the benefits the southern European nations derived earlier this decade from using Europe’s common currency, the euro.

Their ability to issue cheap debt, thanks to the euro’s association with Germany’s sound-money policies, allowed them to borrow more than they could afford and sparked a boom in consumer spending, Randolph said. This also helped the high-saving, export-oriented economies of Northern Europe, by creating a bigger market for their goods.

"In a sense, the euro worked too well," he said. "The benefits masked the fact that these countries were losing competitiveness in terms of labor costs, and now that gap can’t be avoided."

In response, Greece recently promised to sharply cut its budget deficit, from a current level of 12.9% to 3% by 2012. Spain, already facing 19% unemployment after the collapse of a massive housing bubble, says it will cut spending by $70 billion over several years.

But given the scale of the problems and the massive borrowing needs of nations around the globe, it’s little surprise that default fears have failed to go away.

"There’s nothing so far to show they’ve fixed anything," said Tim Backshall, chief strategist for Credit Derivatives Research. "What we’ve seen is a dramatic selloff as investors start to adjust to the lower expectations for the euro area."

While Backshall said he believes most of the selling in government bond markets has come from so-called real money investors who hold securities for the long term, the past week has brought an uptick of traders playing what’s known as sovereign risk.

"Many hedge funds have spotted an opportunity in government debt markets where public finances have been under great stress," Randolph wrote in a recent note to clients. This trade involves "shorting the weaker credits against the stronger, playing on market fears and heightened uncertainty, while making money in the ensuing volatility."

That said, he thinks uncertainty will have to get much greater before there is a real risk of default in Greece, let alone Portugal, Spain or fiscally challenged Ireland. (Those noting the debt worries refer to Portugal, Ireland, Greece and Spain as Europe’s PIGS, and to that group plus Italy as the PIIGS.) Randolph notes that during the 1980s, Ireland’s bonds traded at similar spreads to Greece’s now, without any default.

What’s more, any possible default would deal a blow to the credibility of the euro itself. Economists don’t expect the European Central Bank to stand idly by while a monetary union that took years to assemble disintegrates.

"I believe the EU cannot let either Greece or Spain default, any more than Canada would allow one of its provinces to default," said Maurice Levi, a professor at the University of British Columbia in Vancouver.

But then, few in February 2008 would have predicted the scale of devastation in the financial sector before governments finally stepped in. And even if sovereign defaults still look like a long shot, higher rates and stability worries alone can do their damage when economies are in a weakened state.

That point was driven home Thursday by a stock market selloff led by banks. Spanish banks BBVA (BBVA) and Santander (STD) each plunged more than 9%. Falling spending and higher unemployment can wreak havoc on bank balance sheets, further impeding growth.

"The fundamentals in a lot of these places look pretty ugly," said Backshall. "There’s a sense this probably isn’t the end of this trade." 

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Greek Prime Minister George Papandreou said today the government has no plans for new measures to curb the European Union’s largest deficit.

Plans to tame the government finances are “credible,” he told reporters in New Delhi. The EU backed on Feb. 3 the government’s proposals to trim the deficit after Papandreou pledged to raise fuel taxes and the retirement age and extended a wage freeze to all public workers.

Papandreou said today the proposals need to be implemented to achieve their goals, and the nation has substantial funds available from the EU. Yesterday the International Monetary fund said the Greek plan is “appropriate” and European Central Bank President Jean-Claude Trichet said he’s confident Greece can get the deficit under control.

The risk premium investors demand to buy Greek debt over comparable German 10-year bonds widened 10 basis points to 364 basis points the highest in a week. The benchmark ASE stock index fell for a third day, declining 2 percent, bringing its slide for this week to more than 9 percent.

The deficit reached 12.7 percent of gross domestic product last year, and officials are battling to convince investors it can shrink the shortfall to within the EU’S 3 percent limit in 2012 and avoid a bailout. Yesterday Greece’s biggest union approved the second mass strike this month and tax collectors began a 48-hour walkout, suggesting that workers are ignoring Papandreou’s call for sacrifice.

“He can’t come out and say more needs to be done, he has to talk the plans up,” said Peter Dixon, an economist at Commerzbank AG in London. “The question becomes whether Greece can follow through with the plans they put in place and whether they are enough. The jury is still out on that.”

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The Bank of England may this week pause its 200 billion-pound ($317 billion) bond purchase plan and keep open the option of expanding it further as officials assess if the economic recovery is too anemic to last.

The bank will halt spending with newly created money for the first time since it began the so-called quantitative easing program in March last year, according to the median of 51 forecasts in a Bloomberg News survey. The central bank will release its decision on Feb. 4 at 12 p.m. in London.

Governor Mervyn King is juggling the threat of resurgent inflation against the risk of a relapse in growth after gross domestic product barely rose in the fourth quarter. Officials must also gauge if the economy may need more stimulus to weather reductions in the record budget deficit after the general election, which is due by June.

“I would be surprised if they say they’re going to stop” altogether, Patrick Minford, a former adviser to Margaret Thatcher and now an economics professor at Cardiff University, said in an interview. “This could be quite risky, particularly when governments are going to be taking rebalancing action on fiscal policy. The issue is whether the economy is strong enough to take withdrawal of quantitative easing.”

The pound fell against the dollar to its lowest level this year today, and traded at $1.5858 at 10:52 a.m. in London.

The economy expanded 0.1 percent in the last three months of 2009 as service and manufacturing businesses expanded just enough to end Britain’s deepest recession on record.

Uneven Recovery

Recent data have suggested an uneven recovery. Mortgage approvals unexpectedly dropped in December for the first time in more than a year, Bank of England showed today. Manufacturing expanded at the fastest pace in 15 years, according to a report from the Chartered Institute of Purchasing and Supply and Markit Economics.

“It’s certainly possible that the economy needs more policy support in the future,” said Jonathan Loynes, an economist at Capital Economics Ltd. “When you have a big fiscal tightening coming, which is likely from either party, unless you’ve got some underlying momentum in the economy you may want to loosen monetary policy further.”

Prime Minister Gordon Brown’s Labour Party has trailed the Conservative opposition for two years in voter opinion polls as both parties wage a campaign on plans to cut the budget deficit. The Conservatives led Labour by 11 points, according to an ICM Research Ltd. poll that finished on Jan. 24.

Budget Deficit

Chancellor of the Exchequer Alistair Darling said on Jan. 26 that the government will take steps to trim the 15.7 billion- pound deficit once the recovery gains traction. Cameron has pledged to start budget cuts immediately after the election.

While the prospect of a public spending squeeze looms, the global recovery may still buoy the economy as companies raise overseas sales and take advantage of the pound’s 17 percent drop on a trade-weighted basis since 2007. The Confederation of British Industry said today its index of export orders for small and medium-sized manufacturers rose to a two-year high in the quarter through January.

The pound’s weakness has stoked consumer prices, complicating the Bank of England’s task. The inflation rate jumped 1 percentage point in December, the most on record, to reach 2.9 percent. The central bank’s target is 2 percent.

Inflation Outlook

King said last month that inflation may accelerate further, though policy makers will look through that jump as they focus on the risk that it will slow below their goal because of slack in the economy created by the recession.

The case for adding to the bond-purchase program may strengthen if a pause in the plan results in a jump in bond yields, said Kit Juckes, chief economist at ECU Group Plc in London. He said a 50 basis-point increase in 10-year bond yields to about 4.5 percent may be “inevitable but not disastrous,” though a jump to 6 percent “would scare me.’

“The end of QE will be a pretty short-lived end if it’s really damaging gilt yields,” Juckes said. “QE is working, and pausing makes some sense to let it continue to work, but you really can’t rule out them coming back with more. This is a pathetic little recovery however you look at it.”

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