Finance Blog number 1

Opportunities for Nordic bank mergers will emerge as new capital rules expose weaker players in a post-crisis world, but big-scale tie-ups are doubtful in 2010 as lenders focus on loan losses and curbing risk.

Analysts say that the one possible big deal — between Nordea and Swedbank — is unlikely in the near term due to uncertainty over bad loans, adding that Swedbank’s shares do not fully discount the lender’s exposure to the troubled Baltics.

Consolidation in Nordic banking would make sense: markets are mature, growth opportunities limited and players too small to compete on a pan-European scale. The banks are good targets for foreign players because they are efficient and have been — at least until recently — highly profitable.

Add the new capital requirements that add to costs and eat into profits, and the need for scale is more acute than ever.

But the crisis has made banks shy of risk-taking and left the developments in the regulatory environment uncertain.

“Never say never, but I think all the Nordic players, or financial institutions, are quite busy running their own shops at the moment,” Nils-Fredrik Nyblaeus, senior advisor to SEB chief executive Annika Falkengren, told Reuters.

“The main owners of each of the banks have to be convinced that the synergies are by far outweighing the risk with it, and that’s obviously not the case at this moment.”

Predictions that Europe could see a wave of consolidation as a result of the crisis have so far not come true as most of the bigger players tread carefully.

But there have been rumblings.

The top executive of Nordea, which, with a $46 billion market capitalization, is on par in size with Deutsche Bank, recently said Swedish rival Swedbank made a good fit for his group.

Christian Clausen said the financial crisis had spurred the long-term need for strategic tie-ups, although he added that he expected little would happen in the near future.

SWEDBANK-NORDEA A HOT TIE-UP?

While the recent crisis has not led to any major bank failures or nationalizations in the region, lenders are still smarting from the worst downturn in decades.

Heavy exposure to the Baltics and Ukraine — economies among the worst hit by the recent downturn — and Ireland has left several Nordic players facing very painful loan losses.

The tough climate has made Swedbank — the biggest lender in the Baltics — the hottest tip for a tie-up, with Nordea seen as the main candidate. Some have put potential synergies at 400 million euros ($600 million) a year. 

Read more

Retail gasoline prices headed downward in most places to begin one of the country’s busiest travel weeks, with more than 33 million people expected to hit the road for the Thanksgiving holiday.

Americans are remaining closer to home because of anxiety about the economy, and demand for gasoline is weaker now than it was last year at this time.

That is telling because a gallon of gasoline then cost only $1.93 as the economic crisis unfolded in 2008.

Unlike last year, however, gas is not falling sharply and though prices fell overnight, it still cost about $2.64 per gallon on average, according to Department of Energy data and also auto club AAA, Wright Express and Oil Price Information Service.

"I think we will see some increases in the spring like we always do," said Fred Rozell, retail pricing director at OPIS. "But at this point I think we’re going to kind of see a status quo for a while."

Gasoline prices were either flat or falling in most places, but rose nearly 4 cents across the Midwest, according to a report Monday from the Energy Information Administration.

Crude prices have remained relatively strong, which has helped keep gas prices well above $2.50. A survey by AAA last weekend found that the number of Americans traveling away from home for Thanksgiving will be up just 2.1 percent this year from 2008.

Crude prices have dragged retail gasoline prices higher throughout the year and rose by 9 cents per barrel on Monday. Benchmark crude for December delivery settled at $77.56 a barrel on the New York Mercantile Exchange.

Crude in storage is above normal levels for this time of year and refiners that turn oil into gasoline, jet fuel and diesel are cutting back because demand is so weak.

Valero Energy became the latest to shut down a refinery Friday, the largest U.S. facility shut down so far this year.

That follows other refiners, including Sunoco and Western Refining, who have shut down plants in recent months and laid off almost 1,000 workers.

Refiners say they can’t raise the price of gasoline and jet fuel because people aren’t traveling as much, but they must pay higher prices for crude because of the weak dollar.

Air travel is projected to decline 6.7 percent, or 2.3 million travelers this year compared to 2.5 million in 2008.

Source

The European Ombudsman rebuked European Union regulators on Wednesday for procedural errors in their antitrust probe of Intel but the censure will not affect a 1.06 billion euro ($1.58 billion) fine against the U.S. chipmaker.

The European Commission levied the record fine in May for illegally shutting out rival AMD. The ombudsman’s decision is non-binding but it could help the world’s No. 1 chipmaker in its appeal against the ruling to Europe’s second-highest court.

While the European Ombudsman can only make recommendations, he is one of the few independent checks on the Commission’s antitrust agency, which critics say acts as judge, jury and prosecutor against companies. In his report, Ombudsman P. Nikiforos Diamandouros said he “found maladministration on the grounds that the Commission failed to make a proper note of a meeting with computer manufacturer Dell relating to the Intel investigation.”

He did not make any finding as to whether the EU executive had infringed Intel’s rights of defense.

The ombudsman also did not make a finding of maladministration over Intel’s second allegation that the Commission had encouraged Dell to enter into an information exchange agreement with AMD.

The Commission said it did not agree with the ombudsman’s finding that it should have prepared a formal note on the meeting and said it had given Intel the chance to comment on the non-confidential version of the internal note cash till payday.

“Such internal notes are normally not accessible since they also reflect the Commission’s investigative strategy which parties do not have a right to access,” the EU executive said in a statement.

“Intel’s rights of defense were fully respected throughout the procedure.”

Intel said the ombudsman’s decision validated its charges.

“Intel has consistently said that DG Comp ignored evidence that was potentially exculpatory for Intel and that it was selective in its use of other evidence,” the company said in a statement, referring to the Commission’s Directorate-General for Competition.

The ombudsman’s confidential decision was sent to the Commission and Intel in July this year, before Wednesday’s non-confidential decision was released following consultation with Intel, Dell and AMD, the ombudsman said.

($1=.6712 Euro)

(Reporting by Foo Yun Chee; editing by David Brunnstrom and David Cowell)

Read more

While the national economic picture is starting to brighten, the states are still suffering their worst budget crises in decades, a new report found.

States that have already slashed services and raised taxes to close a collective $54 billion budget gap now face another $51 billion deficit this year and next, according to preliminary results from the Fiscal Survey of States released Thursday.

"These are the worst numbers we’ve ever seen in the decades of putting together this report," said Scott Pattison, executive director of the National Association of State Budget Officers. "States have been forced to lay off and furlough employees, raise taxes, drain rainy day funds and sharply cut state spending in ways that impact every part of state government."

The full report, which will be released in December, is jointly compiled by the budget officers’ group and the National Governors Association. Fiscal year 2010 started on July 1 in 46 states.

Some $135 billion in federal stimulus funding helped states avoid even more draconian cuts, particularly to health services and education. But it was not enough to put the states back on solid footing.

States typically continue to suffer for two years after a national recession is declared over. Many economists predict that the current downturn ended last quarter, when the gross domestic product grew at a 3.5% annual rate.

Back-to-back expenditure reductions

Governors and lawmakers are expected to reduce spending by at least 4% this fiscal year, on top of a 4.8% pullback last year, the study found. This is the first time that expenditures have declined in back-to-back years.

Based on preliminary projections, half the states plan to lay off workers in the current fiscal year, Pattison said in a conference call with reporters. "State governments consider layoffs or furloughs a last resort," he said.

The national recession and soaring unemployment rate, which topped 10% last month for the first time in 26 years, has wreaked havoc on state tax revenues. Some 42 states cut their fiscal 2009 budgets, and 33 states slashed spending for 2010.

Also, states hiked taxes and fees by a total of $23.8 billion, along with $7.7 billion in other revenue increases, for fiscal 2010.

The survey came a day after two other reports also depicted states’ grim financial situations. One, from the Center on Budget and Policy Priorities, said states need as much as $50 billion in additional stimulus funds to keep them from making severe cuts that could threaten the national economic recession and cost 900,000 people their jobs.

Meanwhile, the Pew Center on the States released the names of 10 states in the greatest economic peril.

Already, less than five months into fiscal 2010, several states are looking at additional budget cuts.

Rhode Island announced Tuesday that it is facing a revenue shortfall for the current fiscal year of $130.5 million. Gov. Donald Carcieri said the state must examine its aid to local governments, since it has already cut personnel and social service programs.

And in California, Gov. Arnold Schwarzenegger said Tuesday that his state is facing a budget gap of up to $7 billion. The state will likely announce across-the-board spending cuts in January.

"So we just have to hang in there, tighten our belts and live within our means," Schwarzenegger said.

Last month, Massachusetts Gov. Deval Patrick announced a plan to close a $600 million mid-year budget gap that includes $352 million in cuts across state government, limited revenues hikes and draining a $60 million surplus from the last fiscal year.

And earlier this week, New York Gov. David Paterson said the state would have to come up with an additional $10 billion in savings. He is cutting state agencies funding by 10%, and is proposing reducing $1.3 million in local assistance programs, $686 million in education funding and $471 million in health care spending.

"Frankly, we are running out of money," he said.  

Source

British Airways and Spain’s Iberia announced on Thursday a preliminary agreement for a $7 billion merger to create the world’s third-largest airline by revenue.

The deal, which the companies hope to close by the end of 2010, ends the British flag carrier’s long pursuit of Iberia to create an enlarged group, able to cope with the industry’s largest downturn in decades.

BA shareholders will have 55 percent of the combined firm, to be headquartered in London with 419 aircraft flying to 205 destinations, while Iberia shareholders are to get 45 percent.

In a joint statement, BA and Iberia said the merger would provide “enhanced scale to compete with other major airlines and participate in future industry consolidation.”

The new company will combine British Airways’ strong position in Europe-to-North America traffic with Iberia’s Latin American business, and will potentially be reinforced by a planned alliance with AMR Corp’s American Airlines faxless payday loan.

Iberia’s chairman Antonio Vazquez will be chairman of the new company, while BA’s Chief Executive Willie Walsh will be CEO. Each airline will have seven members on the new 14-member board.

The deal will create a new holding company, which will own the two airlines. The two companies will have dual hubs in London and Madrid, and will keep their own licenses, codes and brands for the first five years of the merger.

This mirrors the structure set up by Air France-KLM from the Franco-Dutch merger in 2004, which created a holding company plus two operational units to preserve national identities and bilateral international landing rights.

Ahead of the announcement of a deal, BA shares closed 7.5 percent higher at 206.8 pence, while Iberia shares ended up 11.8 percent at 2.22 euros.

Read more

U.S. securities regulators are reviewing a proposed roadmap to move U.S. companies to international accounting rules, but are struggling with a lack of public consensus on how to get there, a Securities and Exchange Commission official said on Thursday.

Last November, in one of the Commission’s last major projects under former Chairman Christopher Cox, the SEC staff released a suggestions that would have U.S. companies filing financial results under International Financial Reporting Standards, or IFRS, by 2014, with the option for some companies to adopt the rules earlier.

The adoption of international accounting standards by U.S. companies would move the world toward one set of standards, and might make it simpler for investors to compare companies operating in different regions. Proponents also say this would enable companies to raise capital more easily in whatever markets appeal to them.

When the SEC’s new chairman, Mary Schapiro, took over early this year, she said she would review the proposals, and SEC officials have promised to provide more clarity before 2010.

But at a New York State Society of CPAs conference in New York on Thursday, Julie Erhardt, deputy chief accountant at the SEC, said that while most of the public agrees with the concept of one single set of high-quality accounting standards, regulators have noted there is very little agreement on anything else.

“The comment letters on how to get there were an array, meaning every possible idea you could think of on how to get there, somebody had in a letter — there was no unanimity,” Erhardt said.

The so-called roadmap proposal was originally open for public comment until mid-February, but the SEC extended that period until late April. The agency received about 220 comment letters on the topic, but that is a small number considering the change is likely to affect all of the 10,000-plus U fast payday loan no faxing.S. companies regulated by the SEC.

“In terms of the staff being able to say, ‘Well, here’s a majority view,’ you can’t say that,” Erhardt said of the comment letters which differed on basic concepts such as how many accounting standard setters to have, and whether the United States should permit any companies to make the switch early.

“It creates more of a blank sheet of paper for the staff working with the commissioners,” she said, noting the Commission simply “hasn’t decided yet.”

Among other issues, several companies said they do not believe the SEC has accurately estimated how much a switch to IFRS would cost, and some wonder whether Congress actually supports the proposal, Erhardt said.

Major economies like Japan, Canada, and South Korea are joining Europe and the more than 100 other countries using IFRS, but the United States, which still operates off Generally Accepted Accounting Principles (GAAP), risks remaining the last major holdout.

Some critics say that if the United States embraces IFRS, it could jeopardize more than a century of progress under U.S. accounting rules, and expose companies to more lawsuits because IFRS has largely been designed by less litigious countries and is viewed as more principle-based than rules-based.

“We’re working on what the next steps could and should be, but there isn’t a date certain to announce anything,” Erhardt said.

(Reporting by Emily Chasan, editing by Matthew Lewis)

Read more

Sales of existing U.S. homes probably climbed in September to the highest level in two years as buyers rushed to take advantage of a government tax credit before it runs out, economists said before a report today.

Purchases rose 4.9 percent to a 5.35 million annual rate, according to the median forecast of 76 economists surveyed by Bloomberg News. A gain would be the fifth in six months.

The $8,000 credit for first-time buyers, due to expire Nov. 30, probably pulled sales and construction forward, signaling housing may cool in coming months. While Congress is considering extending the incentive, factors such as lower prices and mortgage rates have also contributed to steadying a market that endured the worst slump since the Great Depression.

“Fears the tax credit will expire certainly would account for a certain amount of the run-up in the market,” said Ellen Zentner, a senior economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Fundamentally, home sales have begun to pick up on their own outside of government help.”

The National Association of Realtors’ report is due at 10 a.m. in Washington. Bloomberg survey estimates ranged from 5 million to 5.6 million. Sales reached a 5.1 million pace in August, up from a 4.49 million pace in January that was the lowest level since comparable records began in 1999.

Combined sales of existing and new homes reached an almost two-year high in July as asset purchases by the Federal Reserve helped drive mortgage rates to all-time lows. Record foreclosures also caused prices to tumble, making houses more affordable for Americans.

Builder Shares

The Standard & Poor’s Homebuilder Supercomposite Index is up 29 percent so far this year, compared with a 21 percent gain for the broader S&P 500.

Purchases of previously owned homes, which make up more than 90 percent of the market, are tabulated when sales close and therefore reflect contracts signed a month or two earlier. Sales of newly built residences, which make up the rest, are counted when a contract is signed, and may therefore cool months before the tax credit expires.

The Commerce Department’s report on new-home purchases is due Oct. 28.

The Realtors’ group and the National Association of Home Builders are lobbying to extend the first-time homebuyers credit on concern demand will wane after it lapses. Lawmakers this week took up the call.

Need All ‘Tools’

“The work of stabilizing the housing market won’t be done” when the credit expires next month, Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said during a panel hearing. “We still need to use every tool at our disposal to fix this problem.”

Dodd and Republican Senator Johnny Isakson of Georgia, a former real estate agent, urged their colleagues to extend the credit through next June. They also proposed expanding it beyond first-time buyers to include all households up to an income cap of $300,000 for couples.

The Fed this week said its 12 district banks saw “stabilization or modest improvements” in many areas of the economy, led by housing and manufacturing. “Most districts reported that housing market conditions improved in recent weeks, primarily from a pickup in sales of low- to middle- priced houses,” the Fed said in its Beige Book of economic conditions in September and early October.

Housing-related companies are still trying to recover. USG Corp., North America’s largest maker of gypsum wallboard, posted its eighth straight net loss last quarter as sales dropped 32 percent from the same time last year.

Source

Federal Reserve Chairman Ben S. Bernanke said the central bank will be prepared to tighten monetary policy when the outlook for the economy “has improved sufficiently.”

“My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period,” Bernanke said at a Board of Governors conference yesterday in Washington, echoing language from last month’s meeting of the Federal Open Market Committee. “At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.”

The Fed chairman didn’t enter into the debate among his colleagues on the FOMC over the pace or timing of a change in monetary policy. Fed Governor Kevin Warsh said Sept. 25 interest rates may need to rise “with greater force” than usual, while New York Fed President William Dudley said Oct. 5 the recovery’s pace “is not likely to be robust” and inflation risks are “on the downside.”

The FOMC reiterated its pledge last month to keep the benchmark lending rate at around zero “for an extended period” to boost a weak recovery that has yet to create jobs. The unemployment rate rose to 9.8 percent last month, the highest level since 1983. Bernanke didn’t discuss the outlook for the economy in his prepared remarks, which outlined the Fed’s response to the financial crisis.

‘More Pointed’

“He could not have been more pointed when reminding his worldwide audience that the low-rates promise is conditional,” said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Money is free and easy right now, and the minute the job losses halt, you can bet the Fed will stop talking about exit strategies, including lifting the Fed funds rate, and start implementing them.”

Any move to tighten policy over the next year may run into opposition from the White House, which has said it doesn’t want to end fiscal or monetary stimulus quickly, the New York Times reported today, without citing anyone.

The Fed chairman, responding to an audience question about the effect of the $787 billion fiscal stimulus package on monetary policy, said he is assessing the impact of the spending on growth.

Capacity

“Looking at the amount of excess capacity in the economy, looking at the low rate of inflation, we believe that conditions will warrant policy accommodation for an extended period,” he said.

Bernanke’s comments come as a global recovery prompts officials around the world to debate the timing of exit strategies. Australia raised rates this week, the first Group of 20 nation to do so since the crisis intensified a year ago. Bank of Japan Governor Masaaki Shirakawa said Oct. 3 the need for the bank’s corporate bond purchase programs has eased.

In Europe, the Bank of England and the European Central Bank both kept rates unchanged yesterday and have signaled little willingness to immediately rein back emergency measures. China’s banking regulator, Liu Mingkang, said in Hong Kong today it’s “ far too early to talk about an exit.”

The U.S. currency strengthened to 89.29 yen as of 9:13 a.m. in Tokyo from 88.39 yen in New York yesterday, while it has dropped 0.6 percent this week. The dollar climbed to $1.4725 per euro from $1.4794, paring its decline on the week to 1 percent.

Stocks Gained

U.S. stocks gained as Alcoa Inc. started the earnings season with an unexpected profit and jobless claims decreased more than forecast. The Standard and Poor’s 500 Index rose 0.8 percent to 1,065.48. Yields on U.S. 10-year notes increased 8 basis points to 3.26 percent. A basis point is 0.01 percent.

The Fed staff is fine-tuning mechanisms designed to drain or neutralize excess cash in the banking system following a doubling of the central bank’s balance sheet. Those tools range from paying interest on bank reserves deposited at the Fed to reverse repurchase agreements, where the Fed pulls cash out of the financial system through a temporary sale of securities.

Bernanke said in the question-and-answer period the Fed could also conduct reverse repurchase agreements with Fannie Mae and Freddie Mac to soak up their excess cash balances guaranteed payday loan.

Money Growth

U.S. central bankers boosted their balance sheet by $1.2 trillion after the collapse of Lehman Brothers Holdings Inc. in September 2008. The Fed has provided emergency credit to markets for commercial paper and asset-backed securities, expanded loans to banks and financed a $30 billion pool of high-risk securities to facilitate the merger of Bear Stearns Cos. with JPMorgan Chase & Co.

The Fed chairman said the bank reserves created through these operations haven’t created growth in broader measures of money. Still, he said Fed actions have improved liquidity and reduced lending spreads, two measures of success for a policy he calls “credit easing.”

“The unstinting provision of liquidity by the central bank is crucial for arresting a financial panic,” Bernanke said. “By backstopping these markets, the Federal Reserve has helped normalize credit flows for the benefit of the economy.”

To keep longer-term interest rates low, the Federal Open Market Committee is also conducting a $1.75 trillion purchase program of Treasury, housing agency and mortgage-backed securities.

Lower the Cost

“The principal goals of our recent security purchases are to lower the cost and improve the availability of credit for households and businesses,” Bernanke said. “The programs appear to be having their intended effect.”

The average rate on a 30-year fixed-rate mortgage fell to 4.87 percent, the lowest since May, Freddie Mac said yesterday. The Fed’s auctions of term loans to banks are also reducing pressures in the market for interbank loans.

The Fed won’t begin raising interest rates until the third quarter of 2010 as the recovery is likely to be too weak to lift employment and incomes, according to a September survey of 57 economists by Bloomberg News.

Richmond Fed President Jeffrey Lacker told reporters at a separate event in Washington yesterday that the risk the economy will slide back into recession “has diminished substantially” yet is “not entirely zero.”

Lacker also said Oct. 1 in a Bloomberg Radio interview that the growth and consumer spending outlook are “more fundamental” to the decision on when to tighten than “labor- market conditions.”

‘Extended Period’

Fed Governor Daniel Tarullo said yesterday in a speech in Phoenix that the strength of the U.S. recovery shouldn’t be exaggerated, while reiterating that rates are likely to remain low for “an extended period.”

“This turnaround is certainly welcome, but it should not be overstated,” Tarullo said. “Although we can expect positive growth to continue beyond the third quarter, economic activity remains relatively weak.”

The economy will expand at a 2.2 percent annual pace this quarter, the economists estimated. Housing markets have stabilized and manufacturing is picking up as companies re- stock lean inventories. Employers cut 263,000 jobs in September, pushing the unemployment rate up to 9.8 percent.

“The unemployment rate is much too high and it seems likely that the recovery will be less robust than desired,” New York Fed President William Dudley said Oct. 5. “This means that the economy has significant excess slack and implies that we face meaningful downside risks to inflation over the next year or two.”

Six Straight Months

Consumer prices have fallen for six straight months from year-earlier levels, the longest stretch of declines since a 12- month drop from September 1954 to August 1955, according to the Labor Department.

The core consumer-price index, which excludes food and energy, rose 1.4 percent in August from a year earlier, down from a 2.5 percent increase in September 2008.

“There is still downward pressure on core inflation and with the unemployment as weak as it is, there is a lot of room, as the Fed sees it, to maintain exceptionally low interest rates,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. LLC.

– With assistance from Gabi Thesing in Frankfurt. Editors: James Tyson, John Fraher

Source

Finance ministers from the Group of Seven meet in Istanbul today pushing for a “strong dollar” amid concern its slide will impede their recoveries from the deepest global recession in the postwar era.

“Everyone needs a strong dollar,” French Finance Minister Christine Lagarde told reporters yesterday before leaving for the talks. That sentiment is “not unique to Europe,” Canadian Finance Minister Jim Flaherty signaled, saying in Istanbul that “the Australians are concerned, we’re concerned in Canada about upward pressure on the Canadian dollar because of the weakness of the U.S. currency.”

Lagarde’s comments came four days after similar remarks from European Central Bank President Jean-Claude Trichet. U.S. Treasury Secretary Timothy Geithner also has pledged support for a “strong” currency. Flaherty said he expected the G-7 to issue a communique following their meeting, after members earlier debated the need for one.

The dollar’s 14 percent slide this year against a basket of seven currencies since early March threatens economic recoveries outside the U.S. by making their exports more expensive. At the same time, Geithner is being forced to defend the dollar’s status as the world’s sole reserve currency.

Traders Watching

“Market-moving announcements could be forthcoming,” said Geoffrey Yu, a foreign-exchange strategist at UBS AG in London. “We expect to hear renewed commitments to the U.S. strong dollar policy and the European delegation may be tempted to communicate their worries on further rises in the euro.”

The dollar, which tumbled about 10 percent against the euro and yen in the past two quarters, slid further after a government report yesterday showed U.S. job losses accelerated in September. It traded at $1.4578 per euro and 89.77 yen late yesterday in New York.

“We’ll have a chance to discuss this in the coming days,” Lagarde said in Gothenburg, Sweden, yesterday before her departure for Istanbul, referring to the dollar.

G-7 members have discussed whether to break with tradition and not release a communique given that G-20’s leaders did so just a week ago after meeting in Pittsburgh. The G-7 is gathering in Istanbul before next week’s annual meetings of the International Monetary Fund and World Bank and its officials will brief reporters from 6 p.m.

China Intransigence

Limiting the G-7’s scope to reverse the decline in the dollar is the absence of China from its ranks and the G-20’s push for a narrowing of global trade and investment imbalances such as the U empire payday loans.S. current account deficit.

Among policy makers expressing concern about the dollar this week were Japanese Finance Minister Hirohisa Fujii. He signaled Sept. 29 his government was open to acting to stabilize the foreign-exchange market, and denied he supported a stronger yen. He won’t discuss the yen’s gains at the G-7, Kyodo News reported yesterday.

Canon Inc., Japan’s biggest maker of office equipment, says every 1 yen appreciation against the dollar will lower its second-half operating profit by 4.2 billion yen ($47 billion). The company based its profit forecast of 110 billion yen on the assumption the yen would average 95 to the dollar in the last six months of the business year.

Lipsky on Currencies

Still, John Lipsky, the IMF’s first deputy managing director, told Bloomberg Television yesterday that at present “there is not a problem in broad terms of valuation of the principle currencies.”

Flaherty two days ago pushed China to let its yuan appreciate “more quickly” after keeping it little changed against the dollar for more than a year.

That view was echoed yesterday by IMF Managing Director Dominique Strauss Kahn, who said he still views the yuan as “undervalued.” The IMF was last week tasked by the G-20 with monitoring its members’ efforts to even out the world economy.

China has frequently ignored campaigns by the G-7 for a more flexible exchange rate. It took almost two years to heed a request to loosen a currency peg with the dollar, only doing so in July 2005. The inflexibility helps Chinese exporters and means other currencies shoulder the burden of the weaker dollar.

While the dollar’s slide may buoy the U.S. economy by boosting demand for its goods, World Bank President Robert Zoellick repeated yesterday that it may lose its rank as the only reserve currency if budget deficits aren’t curbed. For now, it should still attract investors as a haven, he said.

“The American public and the American political leaders take for granted the unique standards of having the reserve currency,” Zoellick said. “You could lose what is an incredible thing to have.”

Source

The Bank of Japan’s Tankan survey will probably show this week that the economic recovery is too weak to convince companies to invest.

Large firms plan to cut capital spending by 9 percent this year, little changed from estimates made three months ago as the nation was emerging from a recession, economists predict the Oct. 1 report will show. Sentiment among big manufacturers is expected to gain for a second period after March’s record low.

Toyota Motor Corp., which has benefited from worldwide government efforts to boost consumption, is still producing a third fewer cars than it is able to build. Bank of Japan Governor Masaaki Shirakawa said this month that while the economy is showing “signs of recovery,” he’s not confident that demand will hold up.

“Whatever the improvements, the absolute level of economic activity is extremely low, much lower than in the initial stage of previous economic recoveries,” said Kiichi Murashima, chief economist at Nikko Citigroup Ltd. in Tokyo. “Plans for business investment should remain very weak.”

Gains in the yen are compounding exporters’ woes by making their products more expensive and eroding the value of profits earned abroad. The Japanese currency climbed to 89.17 per dollar at 11:40 a.m. in Tokyo after earlier reaching an eight-month high of 88.24. The Nikkei 225 Stock Average dropped 2.4 percent.

Pare Spending

Companies in the central bank’s June survey said they plan to pare spending 9.5 percent this year.

The Tankan index of sentiment among large makers of cars, electronics and other goods will rise to minus 33 from minus 48 in June, analysts forecast. The improvement would only restore the index to a level on par with that during the depths of the 2001 recession. The index fell to a record low of minus 58 in March. A negative number means pessimists outnumber optimists.

“It’s not a question of getting happy, it’s a question of getting less miserable,” said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. “Financial markets have stabilized, financing is clearly available and you have some sense of where final demand is going.”

Japan’s export markets are showing signs of picking up. Federal Reserve Chairman Ben S. Bernanke said this month the “recession is very likely over” and the Fed last week indicated the economy has improved enough to allow some emergency lending programs to be scaled back.

Toyota’s U.S. sales rose for the first time since April 2008 in August, buoyed by the government’s “cash for clunkers” program. The automaker will likely raise global production this year by half a million vehicles to meet demand for its Prius hybrid and replenish inventories, the Nikkei newspaper reported last week.

Toyota Output

Even with the increase, output will be one third below the 10 million units that Toyota is able to build. The company forecasts a 450 billion yen ($5 billion) loss this year.

Growth in China, which this year surpassed the U.S. as Japan’s biggest export customer, has also been a boon to manufacturers. Sharp Corp. says subsidies to encourage spending on household appliances will help boost its China sales about 3 percent this year.

About 40 percent of Japan’s factory capacity still sits idle after five months of production increases, weighing on corporate profitability and giving companies little reason to invest or hire. Some $2 trillion in global stimulus measures, coupled with replenishment of inventories, are only providing a temporary boost to sales.

“This is not what will drive the economy into sustainable growth,” said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. “There isn’t much original demand from the market side, from the household side, or from the corporate side.”

Source