Finance Blog number 1

Japanese Financial Services Minister Shizuka Kamei said the central bank should contemplate directly purchasing government debt, increasing political pressure for the policy board to overcome deflation.

“The central bank should consider underwriting debt to help the government create funds for fiscal stimulus,” Kamei said at a parliamentary hearing in Tokyo today. By law, the Bank of Japan is prohibited from buying debt directly.

Kamei’s remarks underscore the growing tension between the central bank and Prime Minister Yukio Hatoyama’s administration over how policy makers can fight price declines. Burdened by the largest public debt in the industrialized world, the government has little room to bolster spending and is urging the bank to take charge in beating the deflation that threatens the nation’s recovery from its longest postwar recession.

“The Bank of Japan is under siege with increasing government pressure and severe deflation,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo, who used to work for the central bank. “The market knows that bond purchases won’t be a panacea for deflation and they would hurt the BOJ’s independence.”

Having the central bank underwrite debt would give the government more access to funds, though it could also heighten investor concern about the nation’s fiscal discipline and drive bond yields higher. The yield on benchmark 10-year government debt rose to 1.31 percent at 1:13 p.m. today.

Fiscal Policy Needed

Kamei said the central bank alone won’t be able to eradicate price declines and that fiscal policy is also needed. Finance Minister Naoto Kan replied by saying fiscal discipline must always be exercised even though spending can help prop up the economy.

“It’s necessary to provide funds for bold fiscal spending” with direct purchases of debt from the central bank, said Kamei, who heads a junior coalition party. “Without fiscal stimulus funds, Minister Kan can’t resolve the economy’s output gap payday loans. He’s not a magician.”

The bank currently buys 1.8 trillion yen ($20 billion) of government debt from lenders each month. Bank of Japan Governor Masaaki Shirakawa has said the purchases are to provide liquidity and aren’t aimed at paying for government projects.

Kamei, head of the People’s New Party, has championed that increased government spending is key to spurring growth. Last year, he forced the government to delay unveiling a stimulus package he said was too small.

‘Show Its Commitment’

“Japan can’t overcome this economic crisis unless the Bank of Japan shows its commitment by going as far as” underwriting debt to pay for government spending, Kamei said.

Kan, a member of the ruling Democratic Party of Japan, has put heat on the central bank to do more to halt price declines and last month indicated he wanted Shirakawa to implement an inflation target. The finance chief said he wants to stamp out deflation as soon as this year and reiterated that he wants the bank to target inflation of 1 percent or higher.

“Given that various efforts to overcome deflation have failed, I won’t say we can immediately overcome this in a few months,” Kan said. “If I were allowed to be ambitious, I’d say I want prices to rise within the year” adding that “that is just my hope.”

Consumer prices excluding fresh food, the central bank’s key gauge of inflation, slid 1.3 percent in January from a year earlier, an 11th straight decline, the government said last week.

Shirakawa, also speaking to lawmakers, said he is committed to keeping policy very accommodative and that having the benchmark overnight lending rate at 0.1 percent has helped lower borrowing costs for companies.

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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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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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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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Anheuser-Busch InBev said Thursday that it plans to fire 10 percent of its work force in Belgium, home to its international headquarters.

The world’s biggest beermaker blamed the cuts on Belgians drinking less beer. A total of 263 jobs out of about 2,700 will be lost. Cuts include 73 executives.

The company also planned to close a brewery in Luxembourg, moving production of beers like Diekirch and Mousel to other facilities. Job losses also come from changing distribution patterns.

One industry analyst said the layoffs reflect A-B InBev’s relentless focus on cutting costs, a pressure that would exist even without the $17 billion debt remaining from the $54.8 billion acquisition of Anheuser-Busch by InBev in 2008.

"These guys are just obsessive about constantly cutting costs. It’s just an obsession," Trevor Stirling, senior research analyst at Sanford Bernstein in London, told the Post-Dispatch on Thursday no teletrack payday loans.

The job cuts in Belgium show that A-B InBev does not expect to find all of its cost-savings by slashing jobs in St. Louis, home to the company’s North American headquarters.

But the company has wielded a heavy ax in St. Louis, slashing 1,000 employees from a work force that once numbered 6,000.

In Belgium, the job cuts were met with displeasure by a union official.

"InBev promised us that they will try to avoid forced layoffs through early retirement," Carlo Rombauts with the ABVV union told Bloomberg News, "but we’re contemplating actions right now."

Last March, A-B InBev said it hoped to ferret out $2.25 billion in cost-savings over the next three years.

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Singapore’s consumer prices fell the least in eight months in November as food and transport costs climbed amid an economic recovery.

The consumer price index slid 0.2 percent from a year earlier, after falling 0.8 percent in October, the Department of Statistics said in a statement in Singapore today. The median forecast of six economists surveyed by Bloomberg News was for a 0.4 percent drop. Prices rose 0.4 percent from October, without adjusting for seasonal factors.

Rising commodity and food prices, coupled with an improving global economy, have sparked concerns that inflation will accelerate and derail Asia’s recovery. That’s prompted policy makers in Australia, Vietnam and India to start raising interest rates or signal they may remove monetary stimulus soon.

“As the economy is expected to continue its recovery, the outlook is for a moderate positive trend in inflation into next year,” said David Cohen, an economist with Action Economics in Singapore.

Singapore’s gross domestic product climbed an annualized 14.2 percent last quarter from the previous three months, the second consecutive expansion as the island exited the deepest recession since independence in 1965.

The central bank, which uses its currency rather than interest rates to manage price gains, forecasts inflation will be about zero this year. It said in October it will maintain a no-appreciation stance in its exchange rate policy, refraining from further monetary easing after opting for a de-facto devaluation of the Singapore dollar in April to counter collapsing exports.

Policy Changes

The Singapore dollar has gained about 3.2 percent in the past six months against the U.S. currency. It fell 0.5 percent to S$1.4119 against the U.S. dollar as at 12:55 p.m. local time.

Australia and Vietnam raised interest rates this quarter to contain inflation. In India, where wholesale food prices are rising at the fastest pace in 11 years, central bank Governor Duvvuri Subbarao said this month that monetary policy, while an “ineffective instrument” to rein in food costs, may be needed to damp inflation expectations.

Bank of Korea Governor Lee Seong Tae said this month the central bank shouldn’t wait too long before gradually raising interest rates, held at a record-low 2 percent since February.

Food prices, which make up 23 percent of Singapore’s consumer price index, rose 0.7 percent in November from a year earlier, after climbing 0.8 percent the previous month. Transport and communications costs climbed 2.4 percent, while housing prices slid 4.6 percent.

Consumer prices will probably rise 0.3 percent in 2009 and 2.8 percent next year, according to the median forecast in a quarterly survey of economists by the Monetary Authority of Singapore released Dec. 9. The central bank forecasts inflation will average 2.5 percent to 3.5 percent in 2010.

“We expect inflation to return modestly by year end and for it to continue climbing in the first quarter next year,” said Matt Hildebrandt, an economist at JPMorgan Chase & Co. in Singapore.

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ST. LOUIS — Holly Cunningham is expanding her business. Angela Watson is rebuilding her life.

Both are happening here, on the fourth floor of the St. Patrick Center, where holiday orders for goodies such as Lemon Heaven cookies and Holly Dolly dessert bars pour in.

It’s the busiest time of the year for Cunningham’s Hollyberry Baking Co., and she has turned to the region’s biggest provider of homeless services to help meet the demand.

St. Patrick is the only homeless services agency in the country to operate an in-house business incubator. In October, the agency opened a licensed commercial kitchen at the incubator and has since doubled its number of tenants, including the popular treat baker.

Cunningham, a Webster Groves mom, admits that it seemed an unlikely fit for her suburban business. Before taking the plunge, she said she gave her biggest sales pitch ever to employees, certain they would have trepidation about working downtown in a building that caters to transients.

She even ran the idea past some of her customers, making sure she wasn’t going completely off track. Support was overwhelming from both employees and customers, she said.

Watson is one of the four St. Patrick Center clients Cunningham has hired. Living in a women’s shelter and enrolled in a recovery program for drug addiction, Watson says the work experience and paycheck will help her get back on her feet and have job skills to get her permanent employment.

"I take life a day at a time," Watson said, as she packed fresh-baked dessert bars into clear plastic bags. "I’m a go-getter."

For Cunningham, the new kitchen at St. Patrick Center serves a dual purpose for her 11-year-old business. She can expand without the expense of adding on to her current business in case the uptick is only temporary. And she can tap into a ready-made work force that has been trained through various programs the center offers.

In turn, the social service agency has a new partner to hire those who many employers shun. In a climate of high unemployment, being homeless — often with a drug addiction or criminal record — makes finding work that much more challenging.

Cunningham and her employees train and supervise the St. Patrick clients working in the center’s kitchen.

"Having an established company here gives us a better grasp of food manufacturing and food distribution," said St. Patrick Center CEO Dan Buck.

St. Patrick Center received a $3.5 million federal grant to renovate two floors of its building at 800 North Tucker Boulevard, including space for a business incubator, which opened last year and now has 15 companies renting space. The businesses share a reception area and conference rooms, with access to office equipment such as a copy machine and postage meter. They pay for office space based on square footage.

The National Business Incubation Association says St. Patrick stands alone nationally as the only known center specifically catering to the homeless that has started an in-house business incubator.

"People are going to pay attention to this, especially given the current economic climate," said Corinne Colbert, spokeswoman for the association, which estimates there are 1,100 incubators in the country.

The U.S. Commerce Department’s Economic Development Administration, pleased with St. Patrick Center’s success, last month awarded the agency an additional $250,000 grant. It will be used to help buy more equipment for the culinary suite, which replaced a seldom used wood shop no fax cash advance. With the additional equipment, seven companies will be able to share the space, including two catering companies, a barbecue-sauce manufacturer, gourmet-popcorn maker and a company that specializes in whole-grain products including frozen waffles. In addition to startups, St. Patrick Center continues to look for established businesses such as Hollyberry to expand into the incubator.

"We’re encouraging companies to expand with a social conscience," Buck said.

The kitchen is a more practical work area than the wood shop, Buck said. Construction jobs are down, but there is always a need for food service and food production, he said.

"It’s an economic sector that is actually hiring," said Buck.

Outside the culinary suite, other businesses are using the St. Patrick incubator to grow their futures. Heaven Sent is one of them.

While in prison for dealing drugs, Lamond Allen repaired the dining hall’s stoves and refrigerators. That tinkering came in handy when his 7 1/2 year sentence ended two years ago.

With the help of St. Patrick Center, Allen got into a program that certified him in HVAC work. With that training, he started Heaven Sent, a building maintenance business.

He currently has a contract with the U.S. Department of Housing and Urban Development to clean up and make safe foreclosed homes, including checking for gas leaks.

Allen has two employees, one an ex-con who went through the same training program as Allen, and another living in transitional housing.

"My whole focus is giving someone a chance," Allen said. Moving his business from his home into St. Patrick Center has helped him navigate the various trappings of a new business including legal, financial and insurance needs. If there is any question on how to run a business, the staff at the incubator, headed by Jan DeYoung, is there to lend a hand.

"They’re my lifeline," Allen said. And through the incubator, he has begun building relationships with other businesses. For example, he hired A.U. Innovative Land Management for a hauling job.

Cathey Allen and Ren

Options traders are growing less bullish on the yen after efforts by Japanese officials to boost the world’s second-biggest economy and a U.S. jobs report led to the currency’s biggest weekly decline in a decade.

Japan’s currency plunged 2.5 percent against the dollar and 1.3 percent versus the euro on Dec. 4 after the U.S. Labor Department said employers cut the fewest jobs since the recession began. The yen sank 4.5 percent versus the greenback for the week, the most since February 1999 and retreating from a 14-year high. Traders sold yen and bought dollars on speculation interest rates in the U.S. will increase before June.

“The improving U.S. jobs market suggests the Federal Reserve won’t stand pat on interest rates longer than the Bank of Japan,” said Kazutoshi Yasuda, general manager of the markets department in Tokyo at FX Prime Corp., a unit of Itochu Corp. Increased U.S. borrowing costs would lead traders to favor using yen to finance higher-yielding investments, leading to more losses for the Japanese currency, he said.

Options showed declining bets the yen will rise. The odds for a gain to 84.5 yen per dollar by the end of March from 90.56 last week fell to 38 percent from 80 percent on Nov. 30, data compiled by Bloomberg show. Chances of a decline to 92 versus the dollar by Dec. 31 reached 63 percent. Options grant buyers the right to purchase or sell an asset at a predetermined price.

Weekly Tumble

The yen tumbled 3.6 percent versus the euro last week, the sharpest slide since the five days to April 3. The yen also fell 4.5 percent against the dollar, the most since the week ended Feb. 19, 1999, when it slumped 5.9 percent. The yen’s biggest drop during the week came after the U.S. Labor Department said payrolls dropped by 11,000 last month, the smallest decrease since the recession began.

The yen traded at 89.90 per dollar as of 11:53 a.m. in Tokyo from 90.56 last week, and was at 133.87 versus the euro from 134.54.

“What the job numbers do is firm up expectations that the Fed interest-rate hike is coming,” said Camilla Sutton, a strategist in Toronto at Bank of Nova Scotia, the nation’s third-largest lender. “That should be a strong-dollar story.”

Federal-funds futures contracts on the Chicago Board of Trade show a 43.3 percent probability the U.S. central bank will raise its target rate for overnight bank borrowing to 0.5 percent by June from the current range of zero to 0.25 percent, up from 12.6 percent odds a month ago.

‘Finally Turning’

UBS AG expects the Fed to set its key rate at the top end of its 0.25 percent range in April and follow with a quarter- point increase in June. The jobs report and last week’s gains “suggest the greenback is finally turning,” Mansoor Mohi-uddin, the Zurich-based bank’s global head of currency strategy, wrote in a note to clients.

The yen was the best performer against the dollar among the 16 most-traded currencies the past four years, Bloomberg data show. It surged to 84.83 on Nov. 27, the strongest since July 1995, from 124.13 in June 2007. The yen tends to advance amid financial turmoil because Japan’s trade surplus reduces reliance on foreign capital.

Record low U.S. interest rates have kept the dollar under pressure at the expense of the yen, making the greenback the favorite for so-called carry trades, where investors raise funds in countries with low borrowing costs and use the proceeds to invest in countries with higher returns.

Benchmark rates of as low as zero in the U.S. and 0.1 percent in Japan compare with 3.75 in Australia and 2.5 percent in New Zealand.

Libor

The London interbank offered rate, or Libor, for three- month loans in the U.S. currency has been below the equivalent yen rate since Aug. 24. In the decade before then, the dollar rate averaged 2.94 percentage points more than the yen rate.

Contracts betting the yen would climb against the dollar rose to 51,710 on Nov. 27, the most since May 2008, according to the Commodities Futures Trading Commission in Washington based on contracts at the Chicago Mercantile Exchange. As recently as June, there more contracts betting on a decline than a gain.

Such “extreme” positioning may suggest that the decline in the yen represents traders unwinding “long” positions rather than an outright bet on the currency’s depreciation, Marc Chandler, the global head of currency strategy at Brown Brothers Harriman & Co. in New York, said in a note to clients on Dec. 4.

The median estimate of more than 30 strategists surveyed by Bloomberg is for the yen to end March at 92 to the dollar and 136 to the euro.

‘Urgent Steps’

Fujio Mitarai, head of Japan’s largest business lobby, called on the government to take “urgent steps” on Nov. 27 to curb gains in the yen, which make Japanese exports less competitive and threaten corporate profits. The same day, Finance Minister Hirohisa Fujii said in Tokyo the nation will “do what is necessary” and he may contact U.S. and European officials to act.

Exports make up about 12 percent of Japan’s economy, compared with 6 percent in the U.S. The nation’s gross domestic product is forecast to shrink 5.7 percent this year, according to the median estimate of economists surveyed by Bloomberg. That compares with a contraction of 2.4 percent in the U.S.

The Bank of Japan announced an emergency 10 trillion yen ($113 billion) credit program on Dec. 1 to combat falling prices and the stronger yen. The spread between dollar- and yen-based Libor narrowed to 2.72 basis points on Dec. 4 from as much as 7.25 basis points on Sept. 8.

Stimulus Plan

“The BOJ’s action worked,” said Masato Mori, senior manager of the business and marketing department at NTT SmartTrade Inc. a unit of Nippon Telegraph & Telephone Corp. “Stopping the yen’s advance will require additional spending from the government.”

A stimulus plan worth as much as 4 trillion yen may be agreed upon today, Chief Cabinet Secretary Hirofumi Hirano said last week. The government planned to announce the measures on Dec. 4 before disagreements between Prime Minister Yukio Hatoyama’s ruling Democratic Party of Japan and coalition partners, who want a larger package, caused a delay.

Bonds to be issued in the fiscal year starting April 1 may reach 146.2 trillion yen compared with a revised 132.3 trillion yen this year, according to Citigroup Global Markets Japan Inc.

“There is probably enough in the policy action in Japan by the government and the BOJ to argue for further upside on cross- yen currencies near term,” said Greg Gibbs, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in Sydney.

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