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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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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HoliMont Ski Resort is planning a $20 million expansion – the largest in its history – to increase the number of residential units surrounding the recreational complex.

Ultimately, the development calls for construction of 93 single-family homes, 72 condominiums, a 27,000-square-foot main chalet, several new slopes and lifts and a new outdoor skating rink. The work is expected to be done in phases during the next few years.

“We’re going to be cautious, and we definitely don’t want to put HoliMont at risk,” General Manager David Riley said.

The project follows the December opening of the $40 million Tamarack Club condo and hotel complex at Holiday Valley Ski Resort.

Between the two resorts, more than $60 million has been or soon will be invested in Ellicottville, which attracts not only Western New Yorkers but people from Ontario, Ohio and Pennsylvania.

“It’s encouraging,” said Corey Wiktor, executive director, County of Cattaraugus Industrial Development Agency. “HoliMont and Holiday Valley continue to work on projects that help refine and define their respective resorts.”

Despite a sluggish national economy, Riley said he is confident the demand is there for residential units – particularly those that allow buyers to “ski in and ski out” of HoliMont.

Last week, a 6,000-square-foot home in the Greer Hill subdivision that borders HoliMont’s Greer Hill run sold for more than $1.5 million to a Canadian buyer. The sale price set a record for the Ellicott-ville area.

“You look at sales like that and it tells you and me that there still is a lot of pent-up demand for real estate here,” Riley said, “even in this economy fast cash.”

The leveling off of the Canadian dollar is fueling development projects, as well, according to Wiktor.

“I think you are going to see a lot of investment in Ellicottville because of the Canadian dollar,” he said.

Much of HoliMont’s development will take place not in Ellicottville but in the neighboring Town of Mansfield. Officials there are nearly finished with their reviews.

“We’re definitely in the home stretch when it comes to all of our approvals,” Riley said, adding that he expects work to start this year on the first phase of residential units.

Based on early projections, he estimates it will take six to seven years to finish the residential units.

“The one thing we are not going to do is overleverage our membership and put HoliMont at risk,” Riley said.

Added Wiktor: “Traditionally, Holiday Valley and HoliMont do projects at incremental levels. You never see them biting off more than they can chew.”

HoliMont is the nation’s largest private membership ski resort with 4,400 skiers. More than 40 percent come from Canada and 25 percent come from Western New York. The remainder are from Ohio, Pennsylvania, Rochester and New England.

HoliMont was founded in 1964 as a private ski resort and companion to the larger Holiday Valley. It has more than 50 slopes and nine lifts and is open to the public on most weekdays. Weekends and holidays, it’s limited to resort members and their guests.

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The Toronto stock market headed for a lower open as oil prices fell on concerns about reduced demand and a stronger U.S. dollar.

The Canadian dollar was down 0.29 of a cent to 97.42 cents US.

U.S. futures also pointed to a negative open despite an earnings report from chip giant Intel Corp. after the market close that blew past expectations on earnings and revenue. But investors were less happy with results from JPMogan Chase, which beat earnings expectations but missed on revenue.

The Dow Jones industrial futures fell 44 points to 10,619, the Nasdaq futures declined 9.25 points to 1,879 and the S&P 500 futures were off 6.8 points to 1,138.4.

JPMorgan Chase earned US$3.28 billion or 74 cents a share during the final three months of 2009, primarily because its investment banking and trading businesses were still profiting from a 10-month market rally. The showing easily topping analysts expectations of 61 cents but total revenue fell below expectations and the company’s stock fell about two per cent in pre-opening trading.

“Even though actual earnings rose fourfold from a year earlier, investors are not happy with the fact that the retail bank operation still reported a loss for the quarter and boosted its loan loss reserves,” observed Andrew Pyle, investment adviser at ScotiaMcLeod in Peterborough, Ont.

“Well, after the almost unbelievable run higher in bank stocks last year you have to expect some disappointments along the way.”

Intel Corp. turned in a profit of US$2.3 billion or 40 cents a share, much higher than the 30 cents a share that analysts forecast. It also beat revenue forecasts and the number one maker of computer microprocessors delivered a bright profit outlook for 2010 short term personal loan.

Oil prices moved down for a fifth session with the February crude contract on the New York Mercantile Exchange 51 cents lower to US$78.88 a barrel.

The latest dip came even as the International Energy Agency predicted in its monthly report that oil demand will average 86.3 million barrels a day this year, or 1.4 million barrels a day more than in 2009.

The February bullion contract on the Nymex moved down $7 to US$1,136 and March copper was unchanged at US$3.39.

Before the markets open, the U.S. government provides two fresh readings on the economy.

The Labour Department is likely to report that consumer prices in December rose 0.2 per cent after rising 0.4 per cent in November, according to forecasts of analysts polled by Thomson Reuters. The report is also likely to show that consumer prices for 2009 posted their first annual drop since 1954.

Later in the morning, the Federal Reserve issues its report on production from factories, mines and utilities for December. Economists predict that industrial production rose 0.6 per cent, after rising 0.8 per cent the previous month.

Overseas, Japan’s Nikkei 225 stock average advanced 0.7 per cent while Hong Kong’s Hang Seng slipped 0.3 per cent.

London’s FTSE 100 index eased 0.24 per cent, Frankfurt’s DAX dropped 0.94 per cent while the Paris CAC 40 declined 0.6 per cent.

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Goldman Sachs’ banking titans and top congressional Democrats don’t often see eye to eye — executive pay caps, anyone? But here’s something the megabank and Capitol Hill agree on: One of the best ways to get financing to worthy small businesses is through a little-known community lending vehicle called a CDFI.

Taken together, Goldman Sachs and the federal government have earmarked more than $300 million to invest in these local financiers in 2010. Compared to Wall Street’s bailout billions, that’s pennies on the dollar, but for CDFIs it’s a jackpot. Next year’s funding pool is almost three times bigger than any they’ve ever had before.

A CDFI is a Community Development Financial Institution, a certification conferred by the Treasury Department. The program gives low-interest government loans, grants and tax credits to organizations that specialize in economically developing low-income and otherwise underserved markets.

CDFIs were a hot topic at the small business lending forum Treasury Secretary Timothy Geithner convened last month to brainstorm solutions to the ongoing credit crunch small companies face. Wary of lending to firms struggling through the recession, banks slashed their small business credit this year.

That left CDFIs, which specialize in riskier loans, scrambling to pick up the slack. Funding requests surged. For the 2010 fiscal year, the CDFI Fund received applications totaling $467 million, a 97% jump from 2009.

Entrepreneur William Ortiz-Cartagena turned to the Opportunity Fund, a California CDFI, for the $10,000 loan that launched his San Francisco parking logistics company. Gentle Parking now has a staff of 12.

"It was very hard to start this company, because traditional lending institutions were just ‘no, no,’ just not even see me in the door," Ortiz-Cartagena told attendees at the lending forum. "I couldn’t even get an appointment with a traditional institution."

Opportunity Fund got Ortiz-Cartagena the money he needed and walked him through the steps of starting a business. "They really sit down with you and make sure that first your business plan is viable — that it can be successful — and then help you throughout the process," he said.

The success CDFIs have had getting money out into communities through the downtown is now being rewarded. For fiscal year 2010, Congress appropriated $247 million for the Treasury’s CDFI Fund, a funding level President Obama signed into law last week. That’s a giant jump from the $107 million the fund got in 2009.

Goldman Sachs (GS, Fortune 500) added more financial fuel with the "10,000 Small Businesses" initiative it launched last month. Over the next five years, Goldman Sachs will dole out $300 million to CDFIs across the U.S. A bank spokesman said $50 million of that money will be distributed through grants, with loans making up the other $250 million.

Community development financiers routinely depend on bank loans and philanthropic donations to fill their coffers, but Goldman’s cash wad is of record size. It’s the largest single-source CDFI funding pool specifically dedicated to small business financing, according to Mark Pinsky, CEO of the Opportunity Finance Network, an industry trade group.

Goldman Sachs said it chose to work through CDFIs because of their track records and community expertise 500 fast cash payday loan.

"They have deep knowledge of local markets and relationships with the borrowers and businesses that are the least-served by the traditional banking system," said Alicia Glen, managing director of Goldman Sachs’ Urban Investment Group.

First at bat

The first CDFI to get an infusion of Goldman capital is Seedco Financial in New York City. The organization landed a $20 million loan, which it will in turn begin lending out early next year.

Part of the money will go to create a new financing program aimed at more mature small companies. Seedco will target businesses that have been around for at least three years, generate annual revenue of $300,000, and have five or more employees.

"We believe that in the $50,000 to $250,000 — and even up to $750,000 — loan amount range, we will be able to have a more material positive impact," said Lesia Bates Moss, president of Seedco Financial.

Targeting small but established companies serves a key goal of both Seedco and Goldman Sachs: Financing job creation.

For one small engineering firm in New York City, a recent Seedco loan is translating directly into financial salvation and two new jobs.

Founded in 2003, IAQ Systems grew steadily until the end of 2008, when the recession hit home.

"We have been hammered on the payment part," IAQ founder and President Sai Barade said. "We were not getting paid on time, and the demand was such that we had to deliver. The ends were not meeting; there was a big gap."

Late last year IAQ landed a contract with the New York City school system that will yield $8 million over three years. But to get that work moving, IAQ needed a loan to make payroll and cover overhead costs.

The company previously tapped bank lines of credit, but "at the end of 2008, all the banks were shrinking away from giving us any lines or loans," Barade said.

Seedco Financial turned around a $200,000 loan within two weeks. "Seedco was very responsive," Barade said. "They understood where we were." The company has 10 employees now and plans to soon add two more.

It doesn’t take even $200,000 to create jobs, though. Opportunity Fund, the San Jose, Calif., lender that financed William Ortiz-Cartagena’s parking business, has an average loan size of $7,000. Its target borrower has one to five employees.

"There is this credit crunch for small businesses, and there is this reality that we need more loans to flow to small business if we are going to have a robust job creating recovery," said Eric Weaver, Opportunity Fund’s CEO and founder.

Opportunity Fund has developed a niche lending to day care and health care providers who work out of their homes. Its interest rates typically run from 6% to 8%.

"For a very small amount of capital, you can start or expand that business," Weaver said. "It is hard work, but it is very important work and it is real income to a family." 

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A five-foot robot sits in Jon Wheatley’s chair during most U.S. investor presentations, listening, speaking, and watching the meeting as Wheatley maneuvers it from a laptop in London. The shtick draws attention to Wheatley and his company, social media Web site DailyBooth.com, but the robot (provided by one of his investors) serves a purpose: Wheatley cannot set foot in the United States.

The 22-year-old Brit’s deportation came from an innocent mistake. When immigration officials pulled him aside during a three-month trip to Silicon Valley last summer, he mentioned he might talk to an attorney about trying to get a visa to stay and build his company there.

Officials deported him, quashing his immigration plans. Wheatley now works nights to match U.S. business hours while his American cofounder, Ryan Amos, runs the Mountain View, Calif., company. "I’m completely bummed out about it," says Wheatley. "It’s something we really shouldn’t have to be dealing with."

Stories abound of smart, motivated foreigners eager to live here, start a business and create jobs amid the nation’s worst economic recession in decades. But no visa exists specifically for entrepreneurs.

Their contributions could be huge: a quarter of American tech companies — including Google (GOOG, Fortune 500), Yahoo (YHOO, Fortune 500) and Intel (INTL) — have foreign-born founders. In Silicon Valley, half of all tech company founders hail from outside America, according to a study by Vivek Wadhwa, a Harvard researcher and Duke engineering professor. These entrepreneurs typically either came here as children or waited years to get their green cards, Wadhwa says. Today, that backlogged process may take decades. It’s a massive reverse brain drain, as skilled foreigners go elsewhere.

"Let these people in and you would way more than double the number of successful startups in the United States," says Paul Graham, whose venture capital firm, YCombinator, provided seed financing to Wheatley’s business.

Graham wrote a blog post proposing that the U.S. issue 10,000 visas each year earmarked specifically for entrepreneurs. The suggestion unleashed a grassroots groundswell and a lobbying Web site, StartupVisa.com. One lawmaker has taken up the cause: U.S. Rep. Jared Polis, D-Colo., introduced a legislative measure last week that would include entrepreneurs in the EB-5 visa class, which is now reserved for foreign investors in U.S. businesses.

The measure is already drawing criticism. "We don’t want this to be another backdoor immigration policy where people just buy their way in," says Rick Oltman, national media director of Californians for Population Stabilization, which wants to eliminate illegal immigration and reduce legal immigration. "We would be skeptical of the government’s ability to monitor this stuff, because of they have not done a good a job of it in the past instant payday loans."

Few would claim that inviting educated people to create jobs and wealth is bad for the economy. Chile has thrown its doors wide open, not only offering permanent visas to entrepreneurs but paying them up to $30,000 to visit the country and another $30,000 to start a business. The government will even pick up the office rent for the first five years.

But laying out the welcome mat in the United States is tricky. Paperwork and bureaucracy mire existing visa rules, and immigration officials are far from hospitable. Audits and investigations are common at companies that hire foreign nationals.

"I have never seen this kind of crackdown on businesses," says Sheela Murthy, an immigration lawyer in Owings Mills, Md. The paperwork required to bring on foreign workers is extremely complicated, and any mistake can result in fines totaling thousands of dollars per violation, she says. "If you don’t dot all your i’s and cross all your t’s, you could be shut down."

A new visa class would mean sorting out a myriad of details, like how the government determines who qualifies as a legitimate entrepreneur. One idea: A board of venture capitalists, entrepreneurs and lawyers could screen those visa applications. The government could set benchmarks, requiring, for example, that a founder own at least 10% of a company that has raised $250,000 within the past year.

Another idea: Create a "gold card" class of investors, whom the government has vetted and trusts. Any investment their firm makes in a foreign national’s business means an automatic green card for that company’s founder.

Of course, there’s a clear pitfall to tying immigration status to business success: Startups fail. What happens to the visa then? Boulder venture capitalist Brad Feld proposes requiring the entrepreneur to start another company within a year or the visa expires.

Despite pressure to do something — anything — to improve the job market, Congress isn’t likely to move any time soon on the startup visa proposal. Lawmakers are tied up slugging it out over health care reform and aren’t likely to take a serious look at immigration reform for at least another year. Even then, controversy over illegal immigration could overshadow or kill the measure.

In the meantime, Wheatley is doing what he can to build his business in the United States — even sending his robot to business mixers. "It’s a little weird sometimes, but we have to make the most of the situation," he says. 

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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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The euro rose against the dollar Thursday after the European Central Bank hinted it would slowly start withdrawing emergency liquidity while the yen fell amid fears Japan may move to weaken its currency.

Though the ECB at a meeting left interest rates at record lows, its president, Jean-Claude Trichet, said the next 12-month refinancing operation for banks would be the last. The bank also lifted its economic growth forecast for 2010.

The euro neared a 16-month high around $1.5140 and rose against the yen but it gave up some gains when Trichet said plans to wind down some emergency programs were not a signal that interest rates may be about to change.

"He hinted that they’ll do something about an exit policy, so the first knee-jerk reaction was euro positive, but he’s not ready to endorse a full exit quite yet, so it’s really neither overly supportive of, nor detrimental to, the euro," said Boris Schlossberg, head of research at GFT Forex in New York.

Ultra-loose monetary policy tends to undermine a currency’s value because it increases money supply and risks inflation.

The euro rose 0.3% to $1.5085 and 1.1% to ¥132.94.

The euro got a modest boost when Bank of America (BAC, Fortune 500) said it would repay bailout funds to the U.S. government. That increased risk appetite and suggested banking sector improvement.

The yen was under pressure for the second straight day after the Bank of Japan said this week it would provide new three-month funding to banks to combat deflation and after top officials warned that the currency had grown too strong.

The dollar was up 0.8% at ¥88.15, off a 14-year low of of ¥84 no fax pay day loan.82 plumbed last week.

BOJ Governor Masaaki Shirakawa said the central bank does not target foreign exchange for monetary policy but "if the bank’s easy stance becomes widely known in markets, it will have certain effects on the currency market in the long run."

Sterling fell 0.3% to $1.6575 while the dollar fell 0.3% to 0.9989 Swiss francs.

Trichet, Bernanke speak

Analysts said Trichet had to walk a fine line as any hint of a rate rise would prompt traders to bid up the euro, especially as the U.S. Federal Reserve has said it would keep its own rates low for an extended time.

"He’s saying the outlook for economic growth is still uncertain, which means he’s not overly confident, and it seems that is capping the euro gains," said Hidetoshi Yanagihara, senior FX trader at Mizuho Corporate Bank in New York.

In Washington, Fed Chairman Ben Bernanke made his case for a second term in testimony before Congress, telling lawmakers the Fed’s forceful actions have prevented a devastating crisis from turning into something even worse.

Bernanke also pledged to maintain price stability and said fiscal deficits eventually have to come down. Some analysts have worried that rising U.S. debt and deficits will undermine the dollar further and eventually provoke higher inflation.

In separate remarks, U.S. Treasury Secretary Timothy Geithner reiterated the importance of a strong dollar and said the United States must persuade the world it will be more fiscally responsible. 

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The Federal Reserve on Tuesday raised its estimate for economic growth next year and forecast lower unemployment ahead, although the jobless rate will stay uncomfortably high for at least the next three years.

The projections were included in the minutes of the Fed’s Nov. 3 and 4 meeting. The forecast shows the central bank expects gross domestic product, the broadest measure of the nation’s economic activity, to grow between 2.5% to 3.5% in 2010. That’s a bit more bullish than the 2.1% to 3.3% growth it had forecast for the period back in June.

The unemployment rate, which hit 10.2% in October according to the Labor Department’s latest reading, is expected to improve to between 9.3% to 9.7% for all of 2010. The Fed’s June forecast was for 2010 unemployment between 9.5% to 9.8%.

The central bank’s forecasts don’t show the labor market getting a lot better in the next few years. Its 2011 forecast is for unemployment between 8.2% to 8.6%, while 2012 unemployment is expected to be between 6.8% to 7.5%, still above the average 6% annual unemployment rate recorded by the Labor Department over the last 30 years.

Going forward from 2012, the forecast is for the unemployment rate to improve to between 5% to 5.2%, levels not seen since the first few months of the latest recession. But that long-term employment outlook is slightly more bearish than the Fed’s previous estimate of a 4.8% to 5% long-term unemployment rate.

Keith Hembre, chief economist First American Funds, said the slightly more optimistic numbers in the forecast are more bullish than the commentary in the minutes, which discuss many areas of weakness and uncertainty about the state of the recovery.

"They’ve had a tendency to be overly optimistic (in the numerical forecasts), and that’s likely the case again today," he said. For example, a year ago the Fed’s forecast was projecting that unemployment in 2009 would come in at between 7.1% to 7.6%. Unemployment hit the upper end of that forecast, 7 easy payday loan.6% in January and has risen steadily from there.

Hembre said the slightly more bullish numbers from the Fed shouldn’t be taken as a sign that the central bank is getting close to raising rates or removing other programs it has put in place to pump trillions of cash into the economy.

While Fed officials have said they believe that the recession that started in December 2007 likely ended at some point this summer, there have been repeated warnings that growth would be somewhat sluggish going forward. Fed Chairman Ben Bernanke recently said economic headwinds, including tight credit and continued weakness in the labor market would stop growth "from being as robust as we would hope."

The Fed’s forecast comes the same day the Commerce Department lowered its estimate for the third quarter’s GDP growth rate to 2.8% from its earlier reading of 3.5%.

Despite the lower unemployment estimates released Tuesday, the minutes they were attached to said that Fed "staff boosted its projection for the unemployment rate over the next several years." Those projections were more detailed than the annual estimates spelled out in the summary.

The Fed policymakers were particularly concerned that the forecasts were more uncertain than normal, and they were worried about a sluggish recovery.

"Business contacts continued to report plans to be cautious in hiring and capital spending even as demand for their products increased," according to the minutes.

But Fed policymakers seemed to be more optimistic than they had been at their late September meeting, when they believed there was a greater risk of the economy not living up to the forecasts. Now they believe there is roughly equal chance that the economy could do better than expected as they are worried about it falling short. 

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