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The Bank of Japan may raise its assessment of the economy for the first time since July 2006, even after a report yesterday showed a record contraction in the first quarter.

Gross domestic product shrank at an annual 15.2 percent pace, the government said yesterday, the steepest drop since records began in 1955. That may represent the worst of the recession and Governor Masaaki Shirakawa’s board will maintain its policy at a meeting ending tomorrow, economists say.

Shirakawa said last week that a “moderate” recovery is likely as exports and production improve, indicating the central bank may be reluctant to expand its purchases of corporate and government debt. The risk is that the policy board underestimates the threat posed by price declines that could smother an economic revival.

The bank “could go much further, expanding its balance sheet more aggressively in order to boost activity and lift the economy out of deflation,” said Ben Eldred, an economist at Daiwa Securities SMBC Co. in London. “But there is no sign that it’s prepared to do so. The result is likely to be a more muted recovery and a protracted period of falling prices.”

Policy makers will hold the overnight lending rate at 0.1 percent tomorrow, according to all 24 economists surveyed by Bloomberg News. The bank may consider adding foreign currency- denominated assets to the collateral it accepts from lenders to guard against further financial-market turmoil, the Nikkei newspaper reported this week, without citing sources.

May Resume Growing

Reports in the past month suggest growth may resume this quarter. Confidence among consumers rose to a 10-month high in April. Exports increased in March from a month earlier, and factory production rose for the first time since September.

Shirakawa said last week that the bank expects the recession to “moderate gradually and the economy to start to level out towards the end of this year.” Economists anticipate the government’s 25 trillion yen ($264 billion) in stimulus measures will provide at least temporary relief.

Still, yesterday’s GDP report showed that even as exports and output begin to stabilize, the recession is spreading to households as companies fire staff and cut wages to stem losses.

While the bank is likely to raise its economic assessment, “policy makers will stay on alert against the risk that growth will fail and prices will keep falling,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo.

Two consecutive quarters of record contractions in GDP have shrunk the economy to its 2003 size and pushed it closer to the deflation that it overcame less than four years ago business card.

‘Worst Is Out’

“The economy has slid so far that whatever you do now, it looks good,” said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. “We’ve had two quarters of shrinking by 15 percent. Of course the worst is out.”

During Japan’s last tussle with deflation, consumers delayed purchases, eroding profits and forcing firms to cut wages. Shirakawa has said consumers this time around still anticipate inflation and a spiral of falling prices is unlikely.

Bank of Japan policy makers say they consider inflation to be stable at zero to 2 percent. That sets the bar too low, inviting price declines, said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo.

“There’s going to be deflation as far as the eye can see,” Jerram said. The central bank should aim for inflation of 2 percent and make a commitment to keep buying bonds to meet the target, effectively printing money in a “permanent debt monetization,” he said.

Buying Debt

Since the central bank cut the key rate to 0.1 percent in December, it has been buying commercial paper and corporate bonds to ease a funding squeeze for companies. It also increased its monthly government bond purchases in March.

Ryutaro Kono, chief economist at BNP Paribas in Tokyo, said the bank should expand the debt purchases to prevent deflation and the government needs to guarantee any losses.

“There isn’t much that monetary policy alone can do to prop up growth,” Kono said.

The eight policy board members forecast last month that the economy will shrink 3.1 percent in the year ending March 2010 before growing 1.2 percent next fiscal year. Consumer prices excluding fresh food will fall 1.5 percent this year and 1 percent in the following period.

Shirakawa told lawmakers yesterday that the first-quarter GDP report didn’t merit any revision to the projections.

“The Bank of Japan has no choice but to go conservative over the next six months or year amid such high uncertainty,” said Masamichi Adachi, a senior economist at JPMorgan Securities Co. in Tokyo who used to work at the central bank. “We can’t completely rule out the risk of a deflationary spiral after the effects of the fiscal stimulus subside.”

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Spain’s economy shrank more than initially estimated in the first quarter as consumer spending extended its slump and unemployment soared toward 20 percent.

Gross domestic product contracted 1.9 percent from the previous quarter, when it shrank 1 percent, the National Statistics Institute in Madrid said today. From the previous year, the economy shrank 3 percent, the most since at least 1970. In an initial report May 14, the statistics office estimated GDP declined 1.8 percent from the previous quarter and 2.9 percent on the year.

Spain, whose construction boom made it a motor of job creation in Europe, now has 4 million people out of work, accounting for almost 70 percent of the annual increase in euro- area unemployment over the last year. About a million new homes remain unsold and the European Commission expects Spain to continue to contract next year even after other economies in the region start to recover.

Private spending will keep falling in annual terms “until the last quarter of 2010,” said Carlos Maravall, head of economic analysis at Analistas Financieros Internacionales in Madrid. “The construction sector is not going to clear that stock of housing until well into 2010, or even practically in 2011,” delaying any recovery, he said.

Retail Sales

Burberry Group Plc, Britain’s largest luxury-goods company, said yesterday it wrote off the value of its business in Spain and cut jobs in the country, where retail sales have been falling for more than a year. Kesa Electricals Plc has said that its Spanish outlets had “extremely weak” results in the four months through April.

Spain’s unemployment rate rose to 17 payday loans.4 percent in the first quarter, double the European Union average, government data show. Joblessness will reach 20.5 percent in 2010 after the economy contracts 3.2 percent this year, the commission has forecast. More than a million Spanish households have no one in work, and a million unemployed people no longer receive government benefits, according to government data.

As the economy slumps, bad loans have more than tripled, according to the central bank. The collapse of the debt-fueled building boom and the squeeze on credit pushed 475 construction and real-estate companies into bankruptcy proceedings in the first quarter.

Political Fallout

The crisis is taking a political toll on Prime Minister Jose Luis Rodriguez Zapatero, who was re-elected last year after pledges of full employment. A poll of 2,500 people by the state- run Sociological Research Center in April showed the prime minister’s Socialist Party would have won 40.8 percent of the vote if elections were held then, against 40 percent for the opposition People’s Party. In last year’s election, the Socialists won 43.9 percent of the vote, against the People’s Party’s 39.9 percent.

Zapatero proposed new incentives last week to encourage people to buy homes and cars, on top of measures already announced that the government says amount to 2.3 percent of GDP, more than any other country in Europe. Extra spending and rising unemployment will swell the budget deficit to 8.3 percent of output this year, according to the Bank of Spain, almost three times the EU limit.

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Prime Minister Manmohan Singh’s electoral victory, the biggest any Indian politician has scored in two decades, may loosen political shackles that have restrained the country’s economic growth as it struggles to free half a billion people from poverty.

India’s benchmark stock index soared more than 17 percent, breaching the daily limit and triggering a second trading halt. The rupee surged as much as 3.3 percent, the most in more than two decades, to 47.78 a dollar, according to data compiled by Bloomberg.

“This is an absolute game changer,” said William Nobrega, the co-author of ‘Riding The Indian Tiger,’ who advises U.S. companies on investing in the world’s largest democracy. “It can truly move India in a much faster pace to where it deserves to be in the global economy.”

Political stability will make India a more attractive investment destination as Singh, 76, seeks the funds to stimulate Asia’s third-largest economy. It may also encourage President Barack Obama and his administration to seek greater cooperation in the fight against rising militancy in neighboring Pakistan and Afghanistan.

Singh’s ruling Congress party will be able to form a government without needing the support of communist lawmakers who frustrated plans to entice foreign investment in his first five-year term. The ruling Congress party won its most seats since 1991 in the election, which concluded May 16.

Caretaker Premier

Singh handed his resignation to President Pratibha Patil today after a cabinet meeting, and will continue as caretaker premier until a new government is formed.

“This is good for India and good for the world,” said Rahul Bajaj, chairman of Pune-based Bajaj Auto Ltd., India’s second-largest motorcycle manufacturer.

Congress and its allies won 261 of the 543 elected lower- house seats, with the party getting 206 lawmakers of its own, 61 more than in 2004 and almost twice as many as the opposition Bharatiya Janata Party. Lal Krishna Advani will continue to lead the BJP in parliament, its chief, Rajnath Singh, said in a statement.

The main Communist party, Singh’s partner in the last administration, won only 16 seats, less than the 43 it gained in the last election. The communists, who resisted increased foreign ownership of insurers and any outside investment in retailing, tried to bring down the government last July over a civil nuclear energy accord with the U.S.

‘Warm Partnership’

The U.S. wants Indian help in its fight against Islamic militancy in the region, especially Pakistan. Singh stalled a peace process with India’s nuclear-armed neighbor following terrorist attacks in Mumbai that killed 166 people in November.

“The U.S. recognizes the significance of the election for the people of India,” the White House said in a statement May 16. “President Obama looks forward to continuing to work with the Indian government to enhance the warm partnership between our two countries.”

Wal-Mart Stores Inc. and Prudential Plc are among global companies that stand to gain a stronger foothold in India now the government can function with fewer coalition partners.

“There were so many major initiatives that were sidelined,” Nobrega said. “It will have a phenomenal boost on the Indian economy this year and next quick pay day loan.”

The incoming government will need to bolster an economy that’s growing at the slowest pace in seven years as the global recession saps demands for Indian goods. Industrial output fell by the most in 16 years in March as exports plunged by a record.

Trading Halt

In the first day of trading after the election results, the benchmark Sensitive index gained 17 percent to 14,284.21, while the Nifty index jumped 17 percent to 4,323.15, triggering a day’s halt in trading for the first time ever.

“The ‘play’ button will be on” now, said Madhabi Puri Buch, Mumbai-based chief executive officer of ICICI Securities Ltd., a unit of India’s second-biggest bank. “If global cues continue to be positive, the ‘play’ could even become a ‘fast forward.”

The election strengthened the leadership credentials of Rahul Gandhi, 38, the heir to India’s leading political family, which has dominated the Congress party since independence from the U.K. in 1947. Gandhi “should be in the cabinet, but I will have to persuade him,” Singh said in New Delhi on May 16, after declaring victory.

India, whose international political ambitions include a permanent seat on the United Nations Security Council, wants to maintain annual growth rates in excess of 8 percent for two decades to reduce poverty.

Millions Undernourished

About 231 million Indians are undernourished, more than in Sub-Saharan Africa, according to the Food & Agriculture Organization. The World Bank estimates 41.6 percent of Indians live on less than $1.25 a day.

Gross domestic product has risen more than four times since 1991, when Singh, then finance minister, abandoned Soviet-style state planning and introduced free-market measures. He cut red tape, removed state-enforced production caps on steel and cement makers, and allowed overseas companies such as Ford Motor Co. to set up Indian operations.

India received about $38 billion of foreign direct investments last year, about a fifth of the flows that went to neighboring China, which opened its economy 13 years earlier. Investments into India have been constrained by an unreliable power supply as well as choked roads and railways.

First Term

In Singh’s first term, Communist resistance stalled a bill to raise the foreign investment ceiling for insurers to 49 percent from 26 percent. He also failed to pass a bill aimed at removing a 10 percent cap on the voting rights of foreign investors in non-state banks. His plan to permit global retailers into India also foundered.

Kamal Nath, a Congress lawmaker and India’s trade and industry minister, said in an interview last week that the government will continue its focus on “stimulating the rural economy” as a means to spur growth. More than three-fifths of Indians live in the countryside.

Congress has introduced a rural jobs program, written off farmers’ loans, and created economic zones, many of them located in the countryside, to create employment, boost consumer demand and win popularity.

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The Federal Deposit Insurance Corp. has shelved plans to extend its program to guarantee bank bonds to 10 years after the Obama administration opposed the move, Chairman Sheila Bair said.

“That’s on hold,” Bair said in an interview today in Washington when asked about implementing the extension of the FDIC’s initiative from the current three-year term. “The Treasury is not completely comfortable with that.”

The FDIC announced the plan in January alongside the unveiling of the government aid package for Bank of America Corp. At the time, the agency said it would be extending its guarantees to covered bonds and other kinds of secured debt that supports consumer lending.

Treasury spokesman Andrew Williams declined to comment on Bair’s remarks today.

Since its January statement, the FDIC has been mum about when and how it might proceed. Bair said today that the agency decided to go in a different direction, and instead proceed with an effort to expand the current program to include an additional type of debt known as mandatory convertible.

Final Rules

Final rules on that new kind of debt will be released soon, Bair said. Interim rules were released in March.

“That will be coming up soon,” Bair said. “That was pretty non-controversial.”

Bair’s remarks provide some clarity to the industry, after four months of silence.

“We’ve kind of been at a loss to figure out what had become of that,” said James Ma, a banking analyst at Barclays Capital in New York payday loan. “The existing program has been very successful.”

The debt guarantees are part of the FDIC’s Temporary Liquidity Guarantee Program, started in October, to provide a backstop to business checking accounts and interbank lending. Federal Reserve Chairman Ben S. Bernanke has credited the TLGP with helping stabilize financial markets, most recently in a May 11 speech at a Fed conference in Georgia.

Banks have about $343 billion in outstanding debt under the TLGP, according to FDIC data. The program provides a safety net for a potential market of more than $1 trillion in bank borrowing and business checking account deposits.

Federal regulators said last week that big banks need to prove they can borrow without the FDIC’s guarantee before they pay back capital injections from the U.S. Treasury.

“A lot of people, not just the Treasury and the Fed, are concerned with the pervasiveness and duration of a federal safety net under our financial system,” said Brian Olasov, a managing director at the McKenna Long & Aldridge law firm in Atlanta. “Now the question is the speed with which you wean capital providers off the I.V.-drip of government support.”

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The Bank of England’s forecasts show Governor Mervyn King may need to print more money than the 150 billion pounds ($227 billion) currently authorized by Chancellor of the Exchequer Alistair Darling, Morgan Stanley said.

The bank may have to ask the Treasury to expand the asset purchase program after predicting this week that inflation will stay below its 2 percent target even if it prints the currently planned 125 billion pounds, Lauren Mutkin, Morgan Stanley’s head of European fixed-income strategy, said in a note today.

King forecast a “a relatively slow and protracted recovery,” on May 13, saying that inflation is more likely to stay below the goal in the next two years than to exceed it. Policy makers have resorted to printing money and using it to buy securities in U.K. debt markets after they cut the benchmark interest rate to a record low of 0.5 percent.

“It opens the door not just to further gilt purchases by the bank, but potentially to an increase in the total scale of purchases authorized by the Treasury,” Mutkin said in the report quick guaranteed personal loans. “All this is very bullish for gilts.”

Policy makers last week increased their asset purchases with newly created money by 50 billion pounds, bringing the total 25 billion pounds short of the maximum allowed. King said on May 13 it’s too early to assess the program’s impact.

Lena Komileva, an economist at Tullett Prebon Plc, also said in a May 13 note that the asset purchase program will probably be expanded. Ross Walker at Royal Bank of Scotland Group Plc said the forecast “leaves the door open for further asset purchases, but hints that quantitative easing is unlikely to stretch far beyond 150 billion pounds.”

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Japan’s economy shrank by a record last quarter amid an unprecedented collapse in exports and a drawdown of inventories that could pave the way for a recovery later this year, a report next week may show.

Gross domestic product contracted an annualized 16.1 percent in the three months ended March 31, following a fourth- quarter drop of 12.1 percent, according to the median estimate of economists surveyed by Bloomberg News. The Cabinet Office will release the GDP report on May 20 at 8:50 a.m. in Tokyo.

Japan’s worst recession since World War II probably reached its bottom last quarter, as a pullback in business and consumer spending compounded the damage done by the export crash that began in October. World markets have shown signs of stabilizing in recent weeks and Prime Minister Taro Aso’s record 15.4 trillion yen ($160 billion) stimulus package has buoyed domestic confidence.

“The first-quarter numbers are awful, but what’s more important are the signs of recovery,” said Julian Jessop, chief economist at Capital Economics Ltd. in London. “Growth might turn positive again in the second quarter,” he said, citing recent rebounds in overseas shipments and production.

Exports plunged a record 26.8 percent last quarter from the previous three months, economists predict the report will show. Consumer spending probably fell 0.9 percent, as companies including Toyota Motor Corp., Toshiba Corp. and NEC Corp. slashed pay and fired thousands of workers to offset losses.

Spending Slump

The drop in private consumption would be the biggest since 1974, excluding the second quarter of 1997 when consumers cut spending 3.5 percent after an increase in the sales tax. Business investment is likely to have fallen 9 percent, the worst retrenchment on record.

“The good news is that the production cycle has hit bottom,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “The bad news is that the second-round effects from the initial export shock are starting to hit,” he said, referring to the recession’s spread to the job market. The unemployment rate surged to 4.8 percent in March from 4.4 percent the previous month, the biggest jump in four decades.

Japan’s first-quarter contraction was probably the most severe since records started in 1955, eclipsing a 13.1 percent plunge that came during the 1974 oil crisis. The drop would also be more than twice as bad as the U.S.’s 6.1 percent slide.

BOJ’s Shirakawa

Reports in the past month suggest the world’s second- largest economy may resume growth this quarter, albeit from a low level classic car insurance. Exports gained in March on a month-on-month basis, the first uptick since May. Factory production also rose, a fact that Bank of Japan Governor Masaaki Shirakawa cited yesterday as a reason for cautious optimism.

“We expect the pace of deterioration in economic conditions to moderate gradually and the economy to start to level out towards the end of this year,” Shirakawa said in a speech at the London Stock Exchange.

Gains in the stock market and earnings projections for the current year add to signs the worst may be over. The Nikkei 225 Stock Average has risen 29 percent from a 26-year low set on March 10. Japanese companies that reported fiscal 2008 results say profits will rise 26 percent in the current business year, according to Tokyo-based Shinko Research Institute Co.

Confidence in the Japanese economy climbed to an 18-month high in May, the Bloomberg Professional Global Confidence Index showed yesterday. Sentiment among Bloomberg users around the world surged the most since the survey began in November 2007.

Replenishing Inventories

Stabilizing demand from Japan’s biggest overseas markets, combined with aggressive inventory cuts, has given companies including Honda Motor Corp. room to raise production. Executive Vice President Koichi Kondo said last month the U.S. has probably bottomed. The automaker plans to boost output at domestic factories this quarter as dealerships clear inventories, the Wall Street Journal reported this week.

The stock adjustment at Honda is part of larger trend among manufacturers that may have exacerbated Japan’s first- quarter contraction, while also setting the stage for recovery. Falling inventories at Japanese companies probably accounted for 0.8 percentage point, almost a fifth, of the economy’s estimated 4.3 percent decline versus the previous three months.

“Firms cut production below the low of final demand. That’s what happened in the first quarter and that’s why the contraction was so severe,” said BNP’s Shiraishi. “Now that the adjustment is coming to an end firms can start to increase production. The rebound could potentially be fairly large.”

Still, the failure of export demand to do better than simply stabilize will probably limit the scope of Japan’s recovery, said Jessop at Capital Economics.

“The best you can hope for is a long period of sub-par growth,” he said. “It’s not going to be a strong recovery but at least it’ll be a recovery.”

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Australia is embarking on the biggest building program in its history, driving its budget deficits to records until 2016 to help counter a recession that may swell the jobless queue to 1 million within two years.

The budget deficit will be A$32.1 billion ($24.6 billion) in the year ending June 30, rising to A$57.6 billion in fiscal 2009-10 as a recession that will linger through next year drives up unemployment and erodes tax receipts, Treasurer Wayne Swan said in his annual budget released yesterday in Canberra.

The government, leading opinions polls, is seeking to prove it can manage the economy amid the global downturn before an election in the next 18 months. It is also trying to reward voters who ousted John Howard in 2007 by delivering policies including paid parental leave, clean energy and family payments.

“They are trying to set the groundwork for the next election,” said Rick Kuhn, a political analyst at Canberra- based Australian National University. “They would want nothing more than an early election, as they know things in the economy will get much worse.”

The government will spend A$8.5 billion on roads, railways and ports and A$3.5 billion to boost the use of energy from clean sources. It will also spend A$2.6 billion on universities, A$3.2 billion on hospitals, and an initial investment of A$4.7 billion on a national broadband network.

High-Income Earners

Swan will reduce tax breaks, welfare payments and raise medical insurance costs for high-income earners as well as sell a record A$60 billion of bonds next fiscal year to pay for the stimulus plan. He’ll raise the pension age to 67 years from 65 by 2023, the first increase since the introduction of government payments to retirees in 1909, to achieve long-term savings.

“The government has managed to successfully juggle the need to support economic growth at a time of global recession,” said Stephen Koukoulas, global strategist at TD Securities Ltd.

“To do less would have compelled the economy to an even weaker performance and even higher unemployment,” he said in London. “To do more would have threatened Australia’s AAA credit rating.”

Australia’s sovereign credit ratings won’t be affected by the budget, Standard & Poor’s, Moody’s Investors Service and Fitch Ratings said after the budget was released. The country has triple-A ratings from Moody’s and S&P, the highest possible. Fitch ranks the country’s debt at AA+, its second-highest grade.

Deficit Forecasts

The Australian currency rose to 76.72 U.S. cents as of 9:21 a.m. in Sydney from 76.17 cents.

The budget-deficit forecast for fiscal 2010 is equivalent to 4.9 percent of gross domestic product, Swan said. The shortfall will hold at A$57.1 billion in 2011 before dropping to $44.5 billion in 2012 and $28.2 billion in 2013, he said.

The economy will shrink 0.5 percent in the 12 months through June 2010 after stagnating in fiscal 2009, the government forecast yesterday.

“You really only get a return to surpluses once the economy grows above trend, and that will take a while given the global environment,” said Stephen Halmarick, an economist at Colonial First State in Sydney. “The recovery will be pretty slow and grinding.”

Australia’s net debt will peak at 13 instant cash advance.8 percent of GDP in fiscal 2014, Swan said. By contrast, most advanced economies will have a debt-to-GDP ratio of 80 percent then, he said.

‘Brutal Force’

“The global recession has been unleashed on Australia with a brutal, uncompromising force,” Swan said. “Never before has a government had to frame a budget with a A$210 billion shortfall” in tax receipts.

In the U.S., President Barack Obama has proposed raising income-tax rates to help narrow a record budget shortfall and pay for a planned overhaul of health care. U.K. Chancellor of the Exchequer Alistair Darling this month raised taxes for top income earners to pay for government efforts to stimulate the economy.

Yesterday’s budget may be Swan’s penultimate before the next election. Rudd may call an early vote if the upper house Senate, which he doesn’t control, refuses to pass all of the budget measures.

Some voters “will be unhappy with the hard choices we’ve taken,” Swan said. “Especially those we have asked to contribute more, because they can afford to do so.”

Unemployment Climbs

The government says a drop in global demand for commodities from Australia, the world’s biggest shipper of iron ore and coal, will trigger a rise in unemployment as companies such as BHP Billiton Ltd. fire workers and shelve expansion plans.

The jobless rate will peak at 8.5 percent by June 2011, from 5.4 percent last month and a three-decade low of 3.9 percent in February 2008, according to the budget.

The government’s forecast implies that the number of unemployed people will rise to about 970,000 in two years from 615,000 last month, according to calculations based on Australian Bureau of Statistics figures.

“There will be one million unemployed by 2011, a record deficit and record net debt,” said Joe Hockey, opposition Liberal-National coalition treasury spokesman. “Having blown all the proceeds of the last mining boom, Labor is betting the house on another upswing that hasn’t even begun yet.”

Infrastructure Spending

Building projects include improving metropolitan rail networks in the nation’s state capitals, expanding the port of Darwin, and upgrading Network 1, Australia’s busiest road freight route that stretches along the eastern seaboard from Melbourne to Cairns. Money was also allocated to fund the building of a high-speed Internet network.

To save about A$5.5 billion over four years, the government will reduce a rebate on private health insurance for people earning over A$75,000, reduce tax breaks for workers who make additional contributions to their compulsory pension funds, and limit welfare payments to wealthy families.

The savings will “put us on the path to surplus by fiscal 2016,” Swan said.

Between 2017 and 2023, the government will also gradually increase the pension age from 65 to 67 to offset the cost of an ageing population that will cut the ratio of workers to pensioners from 5 to 2.5 by 2050. “We have to put in place an essential reform to face this demographic timebomb,” Swan said.

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New Zealand house prices fell for the 10th straight month in April as a deepening recession and falling employment deterred buyers from the market.

Average prices dropped 9.2 percent from the year earlier month, Quotable Value New Zealand Ltd., the government valuation agency, said in an e-mailed report.

Employment slumped 1 percent in the first quarter, the most in almost a decade, adding to signs that New Zealand’s recession is likely to extend for at least a sixth quarter. As job losses mount, consumers and investors have become unwilling to borrow to buy homes.

“The threat of rising unemployment may affect an increasing number of home owners and potential home buyers,” said Blue Hancock, a spokesman for Quotable Value. “We expect values to remain relatively flat over the winter months.”

Property values have fallen about 9 online cash advance.6 percent since their peak in January 2008, Hancock said.

Reserve Bank Governor Alan Bollard has cut the official cash rate by 5.25 percentage points to a record-low 2.5 percent since July to bolster demand. Last month, he said he was unlikely to raise the rate until late 2010.

Lower borrowing costs and cheaper properties have encouraged some buyers into the market, said Hancock. House sales rose in March to a 16-month high, the Real Estate Institute said last month.

Home prices fell 9 percent in Auckland and 8.5 percent in Wellington. Prices across the nation’s 17 main urban centers dropped an average 9 percent.

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Treasury Secretary Timothy Geithner is betting that U.S. banks can do something their Japanese counterparts were unable to accomplish in that country’s “lost decade” of the 1990s: earn their way out of trouble.

The stress-test results released yesterday by regulators found that the 19 largest banks face a $74.6 billion capital hole that may be filled mostly by private money. That compares with the hundreds of billions of dollars seen by outside analysts, including the International Monetary Fund, and takes into account banks’ projected earnings over the next two years.

The “stress-test results are an important step forward,” Geithner said in a statement announcing the results. “Americans should know that the government stands behind the banking system and that their deposits are safe.”

Still, the strategy carries risks for Geithner, 47, who served as a Treasury attach? to Japan from 1989 to 1991. If he’s wrong about the banks’ ability to weather the worst recession in at least half a century, the U.S. may just be postponing the day of reckoning when institutions will have to be shut down and taken over by the government.

“This looks like Japan in 1998, when they didn’t spend enough money on the banks,” said Adam Posen, deputy director of the Washington-based Peterson Institute for International Economics. “They then ended up back in crisis in 2001.”

Paying Off

So far, Geithner’s gamble is paying off. Bank stocks have surged in recent weeks as investors bet the stress tests would give the lenders a clean bill of health. The Standard & Poor’s 500 Financials Index reached its highest close in four months on May 6 as test results leaked out, before slipping 3.5 percent yesterday. It rose 2.5 percent as of 11:13 a.m. in New York.

Geithner said the strategy was designed to ease the uncertainty that drove bank shares down earlier this year. By exposing the lenders to uniform tests and then publicizing the results, he hoped to reassure investors that their worst fears about the future of the banking system were unfounded.

Regulators led by the Federal Reserve found that nine of the 19 biggest banks, including Goldman Sachs Group Inc. and JPMorgan Chase & Co., don’t need more capital. Bank of America Corp. has the biggest hole — $33.9 billion — followed by Wells Fargo & Co., with $13.7 billion. Banks that need to bolster capital have until June 8 to develop a plan and until Nov. 9 to implement it.

Potential Losses

Geithner told reporters that regulators took a conservative approach to toting up potential credit losses and calculating the industry’s ability to absorb them through increased earnings. The forecast of future profits was at the “quite low end of analysts’ expectations,” he said.

The results showed that losses at the banks under “more adverse” economic conditions than most economists anticipate could total $599.2 billion over two years. Mortgage losses present the biggest part of the risk, at $185.5 billion.

Jan Hatzius, chief U.S. economist at Goldman Sachs in New York, said banks may be able to rack up enough earnings over the next two years to cover virtually all the remaining credit losses.

The contraction of the financial industry over the last year, including the demise of Bear Stearns Cos. and Lehman Brothers Holdings Inc., has put those that have survived in a better position to post profits, he said.

Bank Earnings

Banks’ earnings will also benefit from the gap between their cost of funding and loan rates, said Bill Gross, co-chief investment officer of Pacific Investment Management Co., the operator of the world’s biggest bond fund.

“The banking system is enduring and experiencing a very positive yield curve,” Gross said in an interview today with CNBC television, referring to the spread between short-term and longer-term yields low fee cash advance.

With the economy showing signs of being close to a bottom, some of the banks may even end up being overcapitalized, added Sung Won Sohn, an economics professor at California State University in Camarillo, California.

Critics remain unconvinced and charge that the regulators went too easy on the banks in conducting the tests, which were designed to ensure the firms could keep lending even if the economy deteriorated more than most economists expect.

Economic Scenario

Examiners used an “adverse scenario” of a 3.3 percent contraction in the economy this year, and an average unemployment rate of 8.9 percent in 2009 and 10.3 percent in 2010. Economists see a 2.5 percent drop in output this year, and unemployment rates of 8.9 percent in 2009 and 9.4 percent in 2010, according to a Bloomberg News survey.

“The stress was not much of a stress,” said Joseph Stiglitz, a Nobel Prize winner in economics and professor at Columbia University in New York.

Skeptics of the plan such as Posen said Geithner was trying to make a virtue out of a necessity. With public opposition to bank bailouts high, the Treasury secretary felt constrained from asking Congress for more money to help the industry. Treasury has about $110 billion left in the $700 billion bank-rescue package approved by lawmakers last year.

Geithner said the Treasury had enough money remaining in the Troubled Asset Relief Program to cover the banking industry’s needs. Still, he made clear that President Barack Obama wouldn’t hesitate to ask Congress for more should that prove necessary.

Public Opinion

It was public opposition to bank bailouts that prevented Japanese policy makers from taking more forceful action to aid the country’s financial industry in the 1990s.

Like the U.S., Japan at first responded by putting capital into the banks, in 1998 and 1999. The crisis wasn’t fully resolved until 2002, after the government forced the banks to write down or sell off bad loans and effectively nationalized one institution, according to Takeo Hoshi, dean of the School of International Relations and Pacific Studies at the University of California at San Diego.

“I find more and more similarities to Japan as the situation develops here,” he said.

Geithner is counting on yet-to-be launched public-private partnerships to buy up the impaired assets that remain on bank balance sheets. The partnerships will be financed by low-cost credit via the Fed and the Federal Deposit Insurance Corp.

Hubbard’s Doubts

R. Glenn Hubbard, a former chief White House economist under President George W. Bush, voiced doubts the partnerships would work and argued that more dramatic action — and taxpayer money — will be needed to fix the financial system.

“Some more radical solution is going to be in order,” such as dividing troubled institutions into so-called good banks and bad banks, said Hubbard, who is now dean of the Columbia University Graduate School of Business in New York.

Kenneth Rogoff, a former IMF chief economist who’s now at Harvard University in Cambridge, Massachusetts, also said he fears the administration isn’t being forceful enough. Like Japan in the 1990s, Obama has put forward a big fiscal stimulus program to try to get the economy moving again, yet may have been too cautious in acting to repair the financial system.

“If the banking plan still falls short, the fiscal stimulus will have been wasted to some extent,” Rogoff said. “We could end up like Japan, sliding in and out of recession.”

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The number of Americans filing claims for unemployment insurance unexpectedly fell last week to the lowest level in three months, a sign the worst of the job cuts may be over.

Initial jobless claims decreased by 34,000 to 601,000 in the week ended May 2, the fewest since late January, from a revised 635,000 the prior week, the Labor Department said today in Washington. The number of people collecting benefits climbed to 6.35 million the prior week, the 14th consecutive record, showing companies are still not hiring even as staff reductions abate.

Fewer firings reduce the risk that gains in consumer spending will be cut short. Economists surveyed by Bloomberg News predict the payrolls report tomorrow may show unemployment rose to a 25-year high in April, indicating the labor market will be one of the last areas to emerge from the worst recession in at least 50 years.

“The pace of job cuts will slow over the next few months,'' John Herrmann, chief economist at Herrmann Forecasting in Summit, New Jersey, said before the report. “The economy is moving toward stabilization and recovery in the second half. Consumers' prospects for keeping their job are improving.''

Another Labor report showed worker efficiency rose in the first quarter as the worst recession in at least half a century prompted companies to squeeze more output from remaining staff.

Productivity, a measure of employee output per hour, rose at a 0.8 percent annual rate, compared with the 0.6 percent decline reported for the fourth quarter. Labor costs climbed 3.3 percent, compared with a 5.7 percent gain in the previous three months.

Initial claims were estimated to rise to 635,000 from 631,000 initially reported for the prior week, according to the median projection of 36 economists in a Bloomberg News survey. Estimates ranged from 616,000 to 650,000.

Lower Average

The four-week moving average of initial claims, a less volatile measure, dropped to 623,500 from 638,250.

The report reinforces other figures this week that showed the job market was contracting at a slower pace. Companies cut payrolls by an estimated 491,000 workers last month, less than economists forecast and the fewest since October, a report from ADP Employer Services showed yesterday. The ADP figures comprise only private employment and don't take into account hiring by government agencies.

According to Chicago-based placement firm Challenger, Gray & Christmas Inc free credit score., job cuts announced by U.S. employers rose 47 percent in April from a year earlier to 132,590.

Today's Labor report showed the unemployment rate among people eligible for benefits, which tends to track the jobless rate, climbed to 4.8 percent in the week ended April 25, the highest since December 1982, from 4.7 percent. These data are reported with a one-week lag.

State Breakdown

Seventeen states and territories reported an increase in new claims for the week ended April 25, while 36 reported a decrease, led by a 10,800 decline in California that reflected fewer firings in construction and service industries.

Initial jobless claims reflect weekly firings and tend to rise as job growth — measured by the monthly non-farm payrolls report — slows.

The economy has lost about 5.1 million jobs since the recession began in December 2007, making it the worst employment slump of the postwar era. Payrolls probably fell by about 600,000 in April and the jobless rate climbed to 8.9 percent, the highest level since 1983, according to the Bloomberg survey median, ahead of tomorrow's report from Labor.

Recent reports show the economic downturn is abating as the manufacturing and service industries contracted at a slower pace in April and consumer confidence improved.

Bernanke's View

“We continue to expect economic activity to bottom out, then to turn up later this year,'' Federal Reserve Chairman Ben S. Bernanke said this week in testimony to lawmakers. Still, “a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall.''

For some companies, the sales outlook is worsening and additional job cuts were necessary even after staff reductions last year. TRW Automotive Holdings Corp., the world's biggest supplier of vehicle-safety equipment, trimmed its 2009 sales forecast and cut 4,400 jobs in the first quarter following a reduction of 10,000 positions in 2008.

“Taking swift, decisive actions to help mitigate the effects of the downturn remain our top priorities in 2009,'' Chief Executive Officer John Plant said in a statement yesterday.

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