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Japanese Finance Minister Hirohisa Fujii said the government may act to stabilize the foreign- exchange market and denied that he supported a stronger yen, a day after the currency surged to an eight-month high.

“If the currency market moves abnormally, we may take necessary steps in the national interest,” Fujii said at a news conference in Tokyo today.

The remarks signal Fujii, 77, is trying to dispel investors’ perceptions that he favors appreciation of the yen and would be unlikely to step into the currency market to stem its gains. After his Democratic Party of Japan came into power for the first time two weeks ago, Fujii said the idea of a weaker yen helping the nation’s exports is “absurd.”

“Fujii’s reversing his rhetoric,” said Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “Some economists have been saying that this is the beginning of a new strong-yen policy instituted by the DPJ, and Fujii’s comments in the past two days are intended to correct those interpretations.”

The yen has gained about 16 percent in the past year, threatening the country’s export-led recovery by making Japanese products shipped abroad more expensive and eroding the value of repatriated profits.

Not Rapid

Toyoo Gyohten, after being appointed adviser to Fujii today, told reporters that the yen’s recent gains “aren’t rapid.” Gyohten, a former top currency official at the Finance Ministry, he doesn’t see any “major disturbances” in the foreign-exchange market.

In an interview yesterday, Gyohten, 78, expressed support for the U.S. dollar as the world’s reserve currency, saying there’s “no better alternative to the dollar.”

Fujii said that history shows yen-devaluation policies hurt the global economy and countries shouldn’t compete to devalue their currencies. At a forum co-hosted by Bloomberg yesterday, he said he “never said I will leave the yen to strengthen” and he didn’t necessarily accept gains in the currency.

The yen traded at 89.71 per dollar at 5:49 p.m. in Tokyo after yesterday touching 88.24, the strongest level since Jan. 23. The Nikkei 225 Stock Average climbed 0.9 percent after slumping 2.5 percent yesterday on the currency’s advance.

Reaction ‘Understandable’

“Although Fujii insisted that he was misinterpreted, it’s understandable that market players read into his comments the way they did,” said Takumori at Sumitomo Mitsui. “Today’s exchange rate suggests that the market is correcting itself. A yen in the 80s is excessive.”

Deputy Prime Minister Naoto Kan said today that currency markets should be “as stable as possible” and he’s “carefully” monitoring the effect of yen moves on the economy.

Eiji Hirano, a former Bank of Japan executive director, said Fujii intends to retain the option of selling the yen should it gain excessively.

“I don’t think Minister Fujii meant he has ruled out intervention completely,” Hirano said in interview on Sept. 25. “If the yen advances drastically and people panic, intervention can’t be ruled out.”

Japan hasn’t stepped into the foreign-exchange market since the first quarter of 2004, when the central bank at the behest of the Finance Ministry sold a record 14.8 trillion yen ($165 billion) to weaken the currency.

Yen May Weaken

Hirano, who is now a director at Toyota Financial Services Corp., said current market moves don’t warrant action and the yen may depreciate over time because the economy is likely to weaken as the population shrinks and ages.

Some investors say the DPJ’s support for households indicates it’s more willing to allow a stronger yen than the Liberal Democratic Party, which governed Japan for almost all of the past 54 years.

“The DPJ’s foreign-policy bias toward Asia and away from the U.S. and economic policy focused more on households than on large corporations should translate into medium- to long-term tolerance for yen appreciation,” said Tomoya Masanao, an executive vice president at Pacific Investment Management Co.

Fujii stressed in yesterday’s speech that households should underpin Japan’s economic growth rather than exporters.

“The days of high growth driven by exports and big companies are over,” he said. “We want to focus on policies that will foster spending by consumers and domestic demand.”

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Germany’s recovery from recession came in time to give a boost to Chancellor Angela Merkel’s re- election yesterday. It may not last much longer.

Unemployment is set to jump and consumer spending to fall in 2010 as government stimulus runs out, according to the Halle- based IWH institute, an adviser to the government. Companies are warning of a credit crunch, and debt at a post-World War II high leaves policy makers with few options to counter a double dip.

“The chancellor is not to be envied,” Ulrich Kater, chief economist at Dekabank in Frankfurt, said in an interview. “Having rescued the economy through large government aid programs will soon be forgotten and what’s left is cleaning up the mess.”

Exceptional measures of 85 billion euros ($124 billion) lifted spending and subsidized jobs, helping keep unemployment below levels in the U.S. and France, even as the economy suffered its worst post-World War II recession.

“We’re through the worst,” Laurenz Meyer, economic spokesman in parliament for the CDU, said in an interview. “But the second wave of this crisis has yet to hit us.”

Spurred by extra spending equal to 1.6 percent of gross domestic product in 2009, the economy grew 0.3 percent in the second quarter, confounding economists’ forecasts. It may expand another 0.8 percent in this quarter. Growth may reach 0.9 percent in 2010, the IWH institute says.

Germany, the world’s biggest exporter, was hammered by the global contraction as sales of Wolfsburg-based Volkswagen AG cars and Munich-based Siemens AG equipment slumped. The government has forecast a 2009 contraction of 6 percent.

Tax Cuts

Merkel’s Christian Democrats pledged across-the-board tax cuts worth about 15 billion euros and looser labor-market rules making it easier to fire employees. The Free Democrats, her likely coalition partners, want to go even further, creating just three tax brackets with the highest rate at 35 percent, down from the current ceiling of 45 percent.

Even with the 5 billion-euro “cash-for-clunkers” program, the world’s largest, which ended this month, there are no signs consumer spending overall has stabilized, the Kiel-based IfW economic institute said in a Sept. 9 report.

The unemployment rate will jump to 10.3 percent in 2010 from 8.1 percent this year, the IWH institute forecast on Sept. 15. Consumer spending will drop 0.7 percent in 2010 after growing 0.5 percent this year, it said.

Tighter Credit

Adding to the burden, the BGA association of wholesalers and exporters said Sept. 15 that 42 percent of its members expect credit to tighten. Small and mid-sized companies, which provide 70 percent of jobs, will face tougher loan conditions in the first half of 2010, Deputy Economy Minister Hartmut Schauerte said last month.

Faced with such gloom, Merkel will have few tools to deploy. Net new borrowing will almost double next year to 86.1 billion euros, according to the government budget.

“There’s quite a bit of bad news left to digest,” Elga Bartsch, chief European economist at Morgan Stanley in London, said in an interview. “The challenge for the next government is that its fortunes hinge on economic indicators that trail the business cycle.”

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A push from U.S. President Barack Obama and Chinese leader Hu Jintao to shrink trade and investment imbalances is probably years away from being fulfilled, according to comments from their own officials.

Group of 20 leaders met in Pittsburgh yesterday aiming to reduce global capital imbalances blamed for contributing to the financial crisis, including a U.S. reliance on borrowing from abroad to finance spending, and Chinese dependence on exports.

“That’s not a simple thing to achieve, you don’t get that by writing a communique,” David Nelson, acting U.S. assistant secretary of State for Economic, Energy and Business Affairs, said in an interview. Ma Xin, an official at China’s government planning agency, warned that his nation’s “low” consumer spending is a problem that has “accumulated over many years and it is a structural problem.”

Failure to accelerate a shift toward domestic demand in Asia, and to diminished U.S. borrowing, risks laying the ground for future crises. Federal Reserve Chairman Ben S. Bernanke has said the influx of savings from Asian nations contributed to depressing U.S. interest rates in the middle of the decade, when the credit boom that preceded the current crisis began.

G-20 Statement

The G-20 yesterday released a joint statement saying that “ensuring a strong recovery will necessitate adjustments across different parts of the global economy, while requiring macroeconomic policies that promote adequate and balanced global demand.”

“Whatever the communique says, it’s up against a very, very difficult change for China to make, and they’re not convinced they have to make it,” said Derek Scissors, Asia economic policy fellow at the Heritage Foundation in Washington, said in a telephone interview. On the U.S. side, its record budget deficit means “we don’t have any credibility,” he said.

The G-20, which groups the largest developed and emerging nations and was established after the 1997-98 Asian financial crisis, concluded its third summit yesterday. The meetings were elevated to the leaders’ level in November.

“There is value in having leaders meet and agree conceptually, but that’s not the end of the road,” said Nelson of the State Department. “It takes a lot of work, a lot of initiatives.”

Budget Deficit

The U.S. will post a federal budget deficit this year of $1.59 trillion, up from $459 billion last year, according to Congressional Budget Office projections.

While American households increased their savings rate to 4.2 percent by July from a low of 0.8 percent in April 2008, it remains less than half the 8.9 percent average of the 1960s and 1970s.

Similarly, even as China has this year seen its economy accelerate without relying on export gains, it has done little to reduce savings as a share of the economy. Household and corporate savings amount to almost 51 percent of gross domestic product, compared with about 48 percent in 2005, International Monetary Fund figures show faxless cash advances.

“The saving rate in the U.S. is growing and we believe that it is a correction of the old model” of economic growth reliant on debt-financed spending, Ma, director-general of international cooperation at the National Development and Reform Commission, China’s top planning agency, said in Pittsburgh.

China’s Understanding

Ma, speaking to reporters, added that “China also understands that its economic-growth model has some flaws. One of them is low consumption capability.”

Before arriving in Pittsburgh, Obama said redressing global imbalances would be a priority.

“We can’t go back to the era where the Chinese or the Germans or other countries just are selling everything to us,” the president said in an interview with CNN broadcast Sept. 20. G-20 leaders need to make “sure that there’s a more balanced economy.”

Treasury Secretary Timothy Geithner said this week that the higher savings rate is an “encouraging sign.” He added in a press briefing that “one of the great strengths of this country is that we adjust quickly, we move quickly.”

After “a long period of time living beyond our means, you see people already changing behavior,” the Treasury chief said in Pittsburgh. “That’s one reason why we can stand here today and express some measured optimism about our capacity to put in place a more sustainable recovery.”

‘Root Cause’

China’s President Hu told the G-20 yesterday that “the issue of global economic imbalances has drawn close attention from the international community.” The “root cause is the yawning development gap between North and South,” he said, according to an English translation of his text, referring to developed and poorer nations.

Hu’s government is overseeing a 4 trillion yuan ($586 billion) stimulus plan — coupled with record lending, tax cuts and subsidies — to spur the nation’s economy. While exports dropped for a 10th month in August, retail sales climbed 15 percent from the same month a year ago as consumers snapped up everything from televisions to automobiles.

Even so, it will take years for China to build a social safety net, with health care and retirement protections, that would reduce incentives for “precautionary” savings, said Nicholas Lardy, a China economy specialist at the Peterson Institute for International Economics in Washington.

To reduce further its export reliance, China should eliminate manufacturing subsidies that make its exports cheaper, and allow the yuan to appreciate against the dollar, Lardy said.

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Bank of England Governor Mervyn King said two British banks got within hours of a liquidity shortfall on Oct. 6, 2008, and the day after as the U.K. financial system came to the brink of collapse.

“Two of our major banks which had had difficulty in obtaining funding could raise money only for one week then only for one day, and then on that Monday and Tuesday it was not possible even for those two banks really to be confident they could get to the end of the day,” the BBC cited King as saying in an interview to be broadcast later today.

King was referring to Royal Bank of Scotland Group Plc and HBOS Plc, the BBC said. Prime Minister Gordon Brown’s government pledged to invest about 50 billion ($82 billion) pounds in the banking system on Oct. 8, 2008, to save it from meltdown in the aftermath of Lehman Brothers Holdings Inc.’s bankruptcy declared that September.

“It was, it is, probably the worst situation, as I say, we faced in peacetime,” Chancellor of the Exchequer Alistair Darling said, according to a press release from the BBC.

The BBC corrected its original release to say that RBS was one of the two banks in trouble, and not Lloyds TSB Group Plc. In the wake of Lehman’s collapse, Lloyds TSB took over HBOS Plc, the nation’s biggest mortgage lender, to form Lloyds Banking Group Plc. An RBS spokesman declined to comment on the story.

The television program, The Love of Money, is the third in a series looking back on the financial crisis. It will be broadcast on BBC Two today at 9 p.m. in the U.K.

Great Depression

Edward Lazear, chairman of George W. Bush’s Council of Economic Advisers at the time, told the program: “We literally thought that we were on the verge of the Great Depression, and looking back I think we probably were.”

King said that allowing the banks to fail would have brought the economy to a halt, the BBC said.

“Individuals would not have had access to the money in that bank,” he was cited as saying. “Their deposits would have been frozen. The accounts would have not been there for salaries to be paid in to, so many people would not have been paid their salary.

“In turn, they wouldn’t have been able to pay bills to businesses so the businesses would have found that their flow of payments would have come to an end,” King said, according to the BBC.

Emergency Meeting

U.K. business minister Shriti Vadera called a meeting of senior bankers on Oct. 7, 2008, to advise the government on the bailout plan.

“We really only knew by probably about 7 o’clock at night that we, that everyone, was going to get through the next day,” David Soanes, a managing director at UBS AG in London, was quoted as saying in the program.

On Oct. 2, 2008, the Irish government guaranteed all deposits and borrowings at six of its biggest banks to assure customers they could withdraw their money and avoid a bank run. The decision rattled other European governments because it encouraged depositors to move their holdings to Ireland.

Irish Finance Minister Brian Lenihan told the BBC that there was no other choice because of the risk of panic.

“We were anxious to avoid that at all costs,” Lenihan was quoted as saying. “The policy options available to us were to immediately nationalize an institution. If we immediately nationalized that institution the risk was that it could lead to a systemic collapse of all the other institutions.”

French Finance Minister Christine Lagarde said the decision was “a bit of a shock,” the BBC said. Darling told the program that “the lesson that you draw here is you can’t do these things on your own.”

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Federal Reserve Chairman Ben S. Bernanke’s efforts to stoke a U.S. economic recovery may be undermined by the central bank’s other goal of restoring the banking system to health.

The Federal Open Market Committee, at the conclusion tomorrow of a two-day meeting, will probably maintain its assessment that “tight” bank credit is impeding growth, said economists including former Fed Governor Lyle Gramley. Lending contracted for five straight weeks through Sept. 9, a drop that in part reflects Fed orders to banks to raise more capital and toughen lending standards, analysts say.

A failure to restore the flow of bank credit carries the risk that the economic recovery will be slower than the Fed anticipates, or even that the U.S. lapses into another recession, economists say. That would make it more likely the Fed will keep its main interest rate close to zero for a longer period.

“They would be absolutely delighted if banks went out and raised a lot more private capital and then began to lend more,” said Gramley, now senior economic adviser with New York-based Soleil Securities Corp. “Until that happens, the Fed has to continue to try to encourage economic growth through easy money.”

The FOMC, composed of Bernanke, Fed governors and regional Fed-bank presidents, started meeting at 2 p.m. and is expected to release a statement tomorrow at about 2:15 p.m. New York time. Economists surveyed by Bloomberg News unanimously forecast the Fed will leave its benchmark interest rate unchanged.

Extend End Date

The central bank may also decide to extend the end date of its $1.45 trillion program to buy housing debt, now set to expire at the end of the year, and to gradually reduce the size of the purchases.

Banks have become more careful about lending. A Fed report released last week shows banks had $6.85 trillion of loans and leases outstanding to businesses and households as of Sept. 9, down for a fifth straight week and below the record $7.32 trillion in October 2008. Real estate loans, the biggest portion, stood at $3.79 trillion, up $7.5 billion from the prior week while down from a peak of $3.9 trillion.

The Fed’s second-quarter survey of senior loan officers, released Aug. 17, showed U.S. banks tightened standards on all types of loans and said they expect to maintain strict criteria on lending until at least the second half of 2010.

‘Worthy Households’

“While it is important for economic recovery that lenders provide credit to worthy households and businesses, they also must maintain enough capital to withstand losses — even if economic conditions turn out to be worse than anticipated,” San Francisco Fed President Janet Yellen said in a Sept. 14 speech.

“The financial system is still far from healthy and tight credit is likely to put a damper on growth for some time to come,” Yellen continued.

Fed-led stress tests of the 19 biggest U.S. banks earlier this year were designed to ensure that the firms had enough capital to withstand a more severe economic downturn. The tests found that the banks need to raise $75 billion to withstand potential losses.

Separately, regional and some smaller U.S. banks may need $12 billion to $14 billion in additional capital to cope with troubled loans still on their books, the Congressional Oversight Panel said in August.

Banks have a Nov. 9 deadline from the Fed to raise the amount of capital determined by the stress tests. Bernanke said in June that the 10 firms that required capital had raised or announced actions to generate $48 billion of new common equity. The firms included Bank of America Corp., Wells Fargo & Co. and GMAC LLC.

Mortgage Rules

The Fed has taken other steps to make sure banks avoid riskier loans. In July 2008, it tightened mortgage rules by requiring lenders to determine a borrower’s ability to repay and barring other practices that led to the collapse of the housing market.

Minimum regulatory-capital requirements may change as officials in the U.S. and abroad craft new financial rules. Consumers are less credit-worthy as the job market deteriorates and after a record loss of wealth from plunging share prices and real estate values.

Rising unemployment will slow the pace of the recovery, Bernanke said on Sept. 15.

‘Very Weak’

“Even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time,” Bernanke said in response to a question after a speech in Washington. Fed officials in June predicted that GDP will expand 2.1 percent to 3.3 percent next year after shrinking 1.5 percent to 1 percent this year, according to the central tendency of their forecasts.

Banks have plenty of reasons to hold back on lending, analysts say.

Americans fell behind on their mortgage payments at a record pace in the second quarter, with delinquencies rising to 9.24 percent, according to an August report by the Mortgage Bankers Association.

“Consumers aren’t necessarily that creditworthy a proposition right now,” said John Ryding, chief economist and founder of RDQ Economics LLC in New York.

Falling values of commercial real estate are also a problem for banks, with an “uncertain degree of losses” to come, said Ryding, a former Fed researcher. Loans made for commercial property will probably sour and lenders will need to raise more capital to cover credit losses, Mike Mayo, a banking analyst at CLSA Ltd., said today at a conference in Hong Kong.

‘Ratchet Back’

“Banks are all trying to ratchet back their credit exposure,” said Eric Hovde, chief executive officer of Hovde Capital Advisors LLC, who manages about $1 billion with a concentration in financial and real-estate related companies and is chairman of Sunwest Bank in Tustin, California.

For instance, JPMorgan Chase & Co. now requires mortgage borrowers to make bigger down payments than before the crisis, and it has stopped allowing so-called stated-income loans that don’t require documentation of earnings, said Tom Kelly, a spokesman.

Neal Soss, chief economist at Credit Suisse in New York, predicts the lending lull will end within a few months after businesses finish depleting inventories and financial firms better determine how much in capital governments will require them to have.

“Bank lending is going to pick up all by itself as banks go looking for ways to add more juice to their earnings profile,” said Soss, who used to work as an aide to former Fed Chairman Paul Volcker. Soss said he forecasts 3.5 percent economic growth in 2010, on the high end of analyst projections.

Index Rallies

The 24-company KBW Bank Index rallied 69 percent from March 31 through yesterday as concern faded that lenders might not survive the economic slump.

Even as banks hold back, Fed policy makers have been trying to encourage borrowing to stoke an economic recovery. The Fed and other U.S. regulators told banks in November to maintain lending to “creditworthy” borrowers while warning against paying dividends that would cut funds available for loans.

In March, the Fed started an emergency program, the Term Asset-Backed Securities Loan Facility, to restart the loan- securitization markets that help form the so-called “shadow banking” system. That has helped generate investor demand for debt tied to auto and credit-card loans, unfreezing part of the credit markets.

“The question for the Fed, which is a very difficult question, is: what is the appropriate level of bank lending?” said Joseph Mason, a Louisiana State University banking professor and former economist at the Office of the Comptroller of the Currency. “It’s not bubble lending, it’s some subset of that. That is where the art of central banking lies.”

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Hirohisa Fujii, Japan’s new finance minister, says he doesn’t support a weak yen. The world’s biggest banks say that’s just what he may get.

While the yen gained against all but one of the 16 most- actively traded currencies since early August as the Democratic Party of Japan became the likely winner in national elections, forecasters say it will decline 5.2 percent against the dollar and 0.7 percent versus the euro by year-end. The economy is too weak to support a stronger rate, based on the median of 40 estimates in a Bloomberg survey.

Japan will be the only Group-of-10 nation that won’t raise borrowing costs in 2010, keeping its benchmark interest rate at a record low 0.1 percent, the survey shows. The economy will expand 0.8 percent next year after contracting 6 percent in 2009, according to median forecasts, putting assets in the world’s second-biggest economy at a disadvantage to those in countries with higher borrowing costs.

“Everyone is seemingly buying the yen, which I think is ridiculous,” said Jim O’Neill, head of global economic research at Goldman Sachs Group Inc. in London. “The true underlying fundamentals for the yen in my book have deteriorated significantly.”

New York-based Goldman Sachs, which earned more than $100 million from trading for a record 46 days last quarter, predicts the yen will weaken to 98 per dollar and 142 per euro by the end of the year, from 92.23 and 135.25 as of 7:09 a.m. in New York today. Bank of America Corp., the biggest U.S. bank, and HSBC Holdings Plc, the largest in Europe, are even more bearish.

Yen’s Rally

The yen rallied 6.6 percent against the dollar and 3.3 percent compared with the euro as the Democratic Party of Japan, led by Yukio Hatoyama, 62, gained in the polls on the way to an election victory in the lower house of Parliament on Aug. 30 that broke 55 years of almost uninterrupted rule for the Liberal Democratic Party. Only the South African rand has risen more.

During the campaign, the DPJ said a stronger yen will boost household spending by making imported goods less expensive. That’s in contrast to the former administration’s focus on public works spending and keeping the yen weak to help exporters.

Fujii, 77, reiterated that message on Sept. 16, the day the DPJ officially took over, saying he doesn’t support a “weak yen.” The comments drove the currency to 90.13 per dollar, its strongest level since February. The following day, he said it was an “absurd idea” that a weak yen is better for exports.

Suffering Exporters

Shares of Aichi-based automaker Toyota Motor Corp., which makes about 75 percent of its revenue outside of Japan, dropped 1.1 percent on the day of Fujii’s comments even as the Nikkei 225 Index added 0.5 percent.

In a Cabinet Office survey released April 22, exporters said they can remain profitable as long as the yen trades at 97.33 per dollar or weaker. A rising currency hurts exporters by making their goods more expensive to foreign buyers and reducing the value of profits earned abroad. Exports account for 12 percent of Japan’s economy, compared with 6 percent in the U.S.

Tokyo-based Canon Inc., the world’s biggest maker of office equipment, said in its latest financial report every 1 yen change against the dollar would alter its second-half operating profit by 4.2 billion yen ($46 million).

“Fujii’s words will come to haunt him,” said Richard Benson, who oversees $14 billion of currency funds at Millennium Asset Management in London. “The DPJ’s strong-yen policy will hurt the Japanese stock market, leading domestic investors overseas in search of returns, selling the yen in the process.”

Exports Plunge

Exports plunged at an unprecedented 26 percent rate in the three months ended March 31, contributing to the economy’s record 15.2 percent contraction in the quarter. The public debt is almost 200 percent of the economy, compared with about 48 percent in the U.S., according to data compiled by Bloomberg.

The surplus in Japan’s current account, the broadest measure of trade because it includes investment, is shrinking relative to the size of the economy. The measure will fall to 2.1 percent of gross domestic product this year, based on median estimates in Bloomberg economist surveys, from 4.8 percent in 2007 and 3.2 percent in 2008. The household savings rate will drop to 2 percent this year from 3.3 percent in 2008 and more than 10 percent a decade ago, Goldman Sachs says insurance quotes.

Strength ‘Illusion’

“Yen strength is an illusion with short-term investors,” said Tomoko Fujii, Tokyo-based senior currency strategist at Bank of America Securities-Merrill Lynch. The Charlotte, North Carolina-based firm expects the yen to weaken to 105 per dollar and to 158 per euro by Dec. 31. “They’re jumping to the conclusion that the government change will boost the yen, but that’s not the case because there’s no benefit in killing off the exporters,” she said.

Deutsche Bank AG, the world’s biggest currency trader, says the yen will rally to 80 to the dollar by year-end. U.S. interest rates near zero will encourage investors to finance purchases of higher-yielding assets with the U.S. currency at the same time that the improving world economy boosts demand for Japan’s exports.

“Yen is back,” Bilal Hafeez, Deutsche Bank’s London-based head of foreign-exchange strategy wrote in a report to clients on Sept. 17. “The yen may end up being the biggest winner against the dollar.”

The three-month dollar London interbank offered rate, or Libor, fell below the comparable Japanese rate last month for the first time since April 1993. Dollar Libor was 0.29 percent on Sept. 18, while yen Libor was 0.35 percent, according to the British Bankers’ Association in London.

Options Bets

Options traders are betting the yen will rise against all other Group of 10 currencies in the next three months. The cost of contracts used to bet the yen will appreciate versus the dollar are the most expensive relative to those betting on a decline since July 30, so-called 25-Delta Risk Reversals show.

Japanese investors are showing less confidence in their currency. They bought the most foreign bonds in four years last week, purchasing a net 1.66 trillion yen in the period to Sept. 12, according to Ministry of Finance figures released Sept. 17.

The drop in short-term rates reduces the expenses of hedging purchases of foreign bonds, said Keiko Onogi, a Tokyo- based debt strategist at Daiwa Securities SMBC Co., a unit of Japan’s second-largest brokerage.

Exchange Rates

Individual investors in Japan added to foreign currency mutual funds every month since January, according to Investment Trust Association data. Assets in the funds reached 26.9 trillion yen in August, the most since September and up from 20.7 trillion yen in January.

Bank of Japan Governor Masaaki Shirakawa told reporters in Tokyo on Sept. 17 that while stimulus measures, including buying $20 billion of government debt a month, have helped the economy, policy makers are “not confident about the strength” of consumer demand “after those effects fade.”

The central bank is monitoring the exchange rate, which is contributing to a drop in inflation, he said. Consumer prices excluding food plunged at a record 2.2 percent pace in July while the jobless rate hit an unprecedented 5.7 percent the same month, government reports showed.

“The yen is inappropriately strong,” said David Bloom, global head of foreign-exchange strategy in London at HSBC. The government “will mind given the massively deflationary threat Japan is still facing,” he said.

HSBC, the biggest European bank, is telling its clients that the currency will weaken to 105 per dollar and 158 per euro by March 31.

Intervention History

Japanese officials have responded to yen strength in the past by intervening in currency markets, including when Fujii was finance minister between 1993 and 1994. Authorities sold the currency on all four of the last five times since 1995 when the yen approached the 100-per-dollar mark to support exporters.

The Bank of Japan, on behalf of the Ministry of Finance, sold a record 20.4 trillion yen in 2003 and 14.8 trillion yen in the first quarter of 2004, when it traded as high as 103.42 per dollar. The yen declined to an eight-month low of 114.88 versus the dollar in May that year.

“I suspect the people at the Bank of Japan and the Ministry of Finance will start briefing Fujii on what he should and shouldn’t say,” said Neil MacKinnon, global macro strategist in London at VTB Capital Plc, an investment bank. “Incoming policy makers often make a public view on a currency, only for it to be clarified, reviewed or withdrawn once their advisers have a word with them.”

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Russia’s government will focus on becoming less reliant on oil and gas to help the world’s biggest energy exporter rebound from its worst crisis in a decade, Prime Minister Vladimir Putin said.

“Soon the government will start to draw up a so-called crisis exit strategy,” Putin today said at an investment forum in the Black Sea resort town of Sochi. “It will include steps to oversee the modernization of the economy and ensure its post- crisis development.”

Russia’s failure to wean itself off its reliance on commodities has condemned the country to sluggish economic growth as it recovers from a record 10.9 percent contraction in the second quarter, economists say. Energy, including oil and natural gas, accounted for 69.1 percent of exports to countries outside the former Soviet Union and the Baltic states in the first seven months of the year, according to the Federal Customs Service.

Putin called on businesses to invest in overhauling their businesses and modernizing the economy. Emergency state spending is “by no means the only anti-crisis prescription,” he said.

The government will seek to encourage investment by cutting red tape and taking steps to improve the banking sector and stock markets, Putin said, adding that Russia received $17 billion in foreign direct investment in the first half.

‘Not Just Money’

“Its not so much just money and how much money, though this of course is important, but first and foremost, the knowledge and experience that the leading global players posses,” Putin said.

Since the end of May, signs of recovery have emerged with gross domestic product growing a seasonally adjusted 1 payday loan no faxing.5 percent in August for a third consecutive month of expansion, Finance Minister Alexei Kudrin said this week.

“It would be a serious mistake to think that we are through it, that it’s all in the past,” Putin said. “Now it is extremely important to continue work on the systemic problems that gave rise to the crisis.”

Putin suggested “some kind of general agreement on general rules of conduct,” or the use of “several global reserve currencies,” to overcome what Russia has termed an over- reliance on the dollar in the global economy.

Energy Dependence

Though the country’s energy dependence has left it exposed to the fallout of a decline on global demand for commodities, nascent recovery signs mean the price of Russia’s energy exports could be higher than the government is forecasting, Putin said.

“Our forecasts are conservative, but we are sure that the reality will be better,” Putin said. “Much better than we plan.”

Kudrin said yesterday that current oil prices are “overheated,” and a “correction” is likely in the next six months, state television channel Vesti-24 reported. The average oil price over the next three years will be between $57 and $60 a barrel, he said.

Emergency stimulus measures should stay in place for the next six month, Kudrin said in London on Sept. 4.

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Mexico’s central bank left its benchmark interest rate unchanged for a second month on an improved economic outlook and said future decisions may depend on the inflationary impact of fiscal legislation in Congress.

The bank’s five-member board, led by Governor Guillermo Ortiz, held the rate at 4.5 percent, matching the forecasts of all 19 economists surveyed by Bloomberg. The bank cut borrowing costs at its first seven monthly meetings of 2009, lowering the rate by 3.75 points from 8.25 percent at the end of 2008.

The central bank may raise borrowing costs in the first quarter of next year if it sees signs that changes to tax laws approved by lawmakers are fueling inflation, said Pedro Tuesta, senior economist for Latin America at 4Cast Inc. in New York. The bank also said future decisions would depend on the economy.

“If there’s an impact that substantially modifies inflation, they may have to think about raising rates,” Tuesta said in a telephone interview. “They probably won’t do anything until they see the actual impact in February or March.”

On Sept. 8, President Felipe Calderon proposed tax legislation as part of his 2010 budget proposal that would increase income, corporate and sales taxes in a bid to offset diminishing oil revenue and prevent a credit-rating reduction.

Tax Proposal

The proposal calls for imposing a new 2 percent sales tax that would be used to fight poverty. The income tax rate for high-earning individuals as well as corporations would also rise to 30 percent, before dropping to 29 percent in 2013 and returning to 28 percent in 2014.

Calderon’s economic package, if approved by lawmakers, would add less than 1 percentage point to the inflation rate, Finance Minister Agustin Carstens said Sept. 9.

“You have higher taxes, and that should increase prices,” said Benito Berber, an economist with RBS Securities Inc. in Stamford, Connecticut. “It’s going to be inflationary.”

The government also said this month it plans to gradually raise gasoline and diesel prices as it did before it suspended increases in January.

The bank may raise rates as early as November if the government’s plan to boost fuel prices and increase taxes spurs inflation, said Mario Correa, an economist at Grupo Financiero Scotiabank in Mexico City.

“Inflation hasn’t ceased to be a concern,” Correa said in a telephone interview. “It’s still well above the official target.”

Inflation Outlook

The annual inflation rate fell to 5.08 percent in August, the lowest level in more than a year, as costs declined for tourism packages, local telephone services and avocados.

The central bank forecasts inflation at between 4.75 percent and 5.25 percent in the third quarter, and between 4 percent and 4.5 percent in the fourth quarter. Its inflation target is 3 percent. The government forecasts annual inflation will be 4.3 percent at the end of this year.

Banco de Mexico said in a statement accompanying its decision today that the economy will improve in the second half of the year after a “highly severe” contraction in the first half.

“The most recent indicators for industrial production, employment and consumer confidence indicate that the economy touched bottom and is beginning an expansionary phase,” the bank said.

Mexico’s $1.09 trillion economy contracted 10.3 percent in the second quarter and job losses accelerated as the recession in the U.S., which buys about 80 percent of Mexican exports, sapped demand for its products.

The central bank forecasts the economy will shrink as much as 7.5 percent this year, which would be the biggest contraction since the 1930s.

Auto Production

The recession in Latin America’s second-largest economy is easing on restoration of credit, rising auto output and growing consumer demand in the U.S, Deputy Finance Minister Alejandro Werner said yesterday. Industrial production fell 6.5 percent in July, which was less than the 9.1 percent forecast by economists in a Bloomberg survey.

“All indicators point toward a bottoming of the economy in the second quarter,” Berber said. “There’s no reason to continue cutting.”

At 4.5 percent, the key lending rate is the lowest since Ortiz began targeting the overnight lending rate in 2005. Previously, Banco de Mexico implemented monetary policy by targeting the money supply through a system known as the “corto.”

Lower interest rates can help prompt businesses to invest and consumers to buy on credit. Cheaper loans also can spur inflation by strengthening demand.

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European Union leaders said the Group of 20 nations should agree on binding rules backed by national sanctions to curb bank bonuses, a week before a summit of the top industrial and emerging nations in Pittsburgh.

The EU agreement on the need for action failed to include details of how such curbs would be achieved, leaving any details to be negotiated at the G-20 summit. Leaders of the 27 EU states said voters would react with anger if bankers were allowed to award themselves large bonuses while relying on public money for their survival.

“The bonus bubble burst tonight,” said Swedish Prime Minister Fredrik Reinfeldt, whose country holds the EU’s rotating presidency, after chairing the meeting in Brussels late yesterday. “We have agreed to say that ‘enough is enough’ and that we need to move away from the current culture of compensation based on short-term performance.”

Leaders agreed that bonuses should be tied to a bank’s performance and that guaranteed bonuses should be avoided. The “major part” of bonuses should be deferred and “could be canceled in case of a negative development in the bank’s performance.”

U.K. Prime Minister Gordon Brown said officials were still negotiating over whether bonuses should be kept to a proportion of revenue instead of profits. He said a “limitation on individual bonuses” was also being discussed.

“People have put forward a number of proposals,” Brown said. “What we are looking for are common international rules that can suit every country with the minimum of interference and a maximum of impact.”

‘Rules on Bonuses’

Asked whether Europe would go it alone if the G-20 failed to agree on curbing bonuses, European Commission President Jose Barroso said the EU’s executive arm has already “put on the table” some “precise rules on bonuses.”

These are “not only recommendations but legally binding proposals,” Barroso said. “So whatever the result of Pittsburgh, the commission position is: ‘yes,’ we should adopt in Europe some of these rules.”

Yet differences over bonuses highlight the difficulties the world’s leading industrialized and emerging economies face as they seek agreement on measures to prevent a recurrence of the worst financial and economic crisis since World War II.

Michael Froman, a deputy assistant to U.S. President Barack Obama said two days ago that the U.S. is reluctant “to set individual compensation levels.”

Sanctions

Also, even though Brown has joined German Chancellor Angela Merkel and French President Nicolas Sarkozy this month in calling for G-20 leaders to impose binding global rules on bonuses, and back “sanctions” for banks that refuse to cooperate, other differences remain guaranteed high risk personal loans.

The U.K. has rejected signing up to proposals that would have any national government set a cap on bonuses, suggesting countries will implement any agreement in different ways.

Chancellor of the Exchequer Alistair Darling earlier this month signed up to a G-20 pledge to ask regulators to study ways of tying a bank’s bonus pool to regular wages, rejecting a cap for individual firms.

“We need a cap for the bonuses as part of your income, or part of the revenue of the company” that a person is working for, Reinfeldt said. “We, of course, know that the United States is very often against this idea.”

Merkel said bonus payment limits are one of her top goals for the G-20 summit.

Tie to Profits

“I’m optimistic that we can make clear that bonus payments must be tied to long-term profitability,” Merkel said, adding that such payments can’t be granted when companies make losses.

Europe and the U.S. may also struggle to reconcile their views on capital requirements for banks. BNP Paribas SA Chief Executive Officer Baudouin Prot said the “very high” capital ratios proposed by the U.S. would put French and other European lenders at a disadvantage to their U.S. competitors.

Sarkozy said that imposing tougher requirements on banks to maintain capital reserves would help curb bonuses.

“The idea of raising capital requirements in proportion with speculative activities, which are generating these so shocking bonuses, seems a more efficient capping method,” Sarkozy said

At a preparatory meeting of European finance ministers and central bank governors in London on Sept. 5, French Finance Minister Christine Lagarde said the G-20 should amend and enact the so-called Basel II rules before discussing any new rules.

Leaders of advanced and emerging economies will discuss steps to regulate markets, curb executive pay and raise capital requirements for banks at the Sept. 24-25 summit in Pittsburgh, the latest bid to coordinate the global response to the crisis.

Merkel, speaking in Frankfurt yesterday, urged G-20 members to agree “that no financial center, no financial institution and no financial product remains unregulated.” Capital requirements must be designed to limit banks’ size, she said.

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Confidence in the world economy held at a record high in September after reports suggested the recession is over and officials said they won’t rush to withdraw stimulus, a Bloomberg survey of users on six continents showed.

The Bloomberg Professional Global Confidence Index rose to 58.54 this month from 58.12 in August. The index exceeded 50 for a second month, which means there were more optimists than pessimists. Measures of confidence in France and Germany surged after their economies unexpectedly grew last quarter.

The world is emerging from the deepest recession since the 1930s after more than $2 trillion of infrastructure projects, tax breaks and government spending, and interest rates near zero averted a spiral into another Great Depression. The pace of the rebound may be tempered by rising unemployment, which the White House predicts will surpass 10 percent next year in the U.S.

“Now we have to see if the increase in confidence is matched by actual growth,” said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, and a survey participant. “The recovery is still fragile.”

The survey of more than 1,800 Bloomberg users was conducted between Sept. 7 and Sept. 11. Since the previous survey, President Barack Obama signaled the U.S. economy is expanding again and the European Central Bank raised its growth forecasts. Finance ministers from the Group of 20 also committed to continuing emergency measures to help strengthen the recovery.

Manufacturers Optimistic

Asian stocks rose today. The MSCI Asia Pacific Index climbed 1 percent to a one-year high of 118.81 as of 12:55 p.m. in Tokyo as commodity prices jumped. Japan’s manufacturers turned optimistic for the first time in almost two years, a government survey also showed today.

The Federal Reserve last week said 11 of its 12 regional banks reported signs of a stable or improving economy in July and August. A measure of U.S. participants’ confidence in the world’s largest economy was unchanged at 47.3, the survey showed, after jumping from 29.5 the previous month.

Warren Buffett, the billionaire investor who last year called the financial crisis an “economic Pearl Harbor,” said Sept. 15 that the U.S. economy has “hit a plateau at bottom.”

“We have not bounced but we’ve quit going down,” Buffett, the 79-year-old chief executive officer of Berkshire Hathaway Inc., said in an interview on CNBC.

Stimulus Spending

Fed Chairman Ben S. Bernanke said Sept. 15 that the U.S. recession has probably ended even as he warned the expansion may not be strong enough to immediately bring down unemployment. Policy makers last month left the key interest rate between zero and 0.25 percent and said economic conditions mean the rate will stay “exceptionally low” for an “extended period.”

In Europe, where companies such as ASML Holding NV, the region’s largest maker of semiconductor equipment, are raising sales forecasts, officials have signaled they will keep stimulus measures to ensure the economy is back on a more stable footing.

ECB President Jean-Claude Trichet this month said the euro region’s recovery from recession will be “bumpy.” He viewed current interest rates, at the lowest level since the ECB took charge of rate policy in 1999, as “appropriate.” The confidence gauge for western Europe rose to 43.2 from 41.1.

“Policy makers need to be careful not to withdraw support too quickly,” said Guy LeBas, chief economist at Janney Montgomery Scott LLC in Philadelphia free credit report online. “There’s potential for conditions to deteriorate,” he added.

Latin America

Sentiment dropped the most in Spain, where unemployment is approaching 20 percent, the highest level in Europe. Spain’s economy contracted for a fifth quarter in the three months to June, and inflation is slowing more sharply than in the euro region overall. Spain’s index fell to 14.5 from 24.7.

Confidence rose the most in the Latin American region this month, with its index advancing to 65.5 from 57.6 in August. Brazil, the region’s biggest economy, emerged from recession last quarter amid rising domestic demand, and its Bovespa stock index has doubled this year. Brazil’s confidence measure rose to 88.2 from 80.6, the survey showed.

“Emerging markets in Asia and Latin America will continue to be the frontrunners of global economic growth,” said Tai Hui, head of Southeast Asian economic research at Standard Chartered Plc in Singapore. “Commodity prices are rising and that will help lift the economies.”

Japanese Election

Sentiment fell in Japan, where elections last month resulted in a victory for the Democratic Party of Japan as it ousted the party that ruled the nation for all but 10 months since 1955. The gauge for Japan fell to 48.8 from 50, while that of Asia slipped to 73.6 from 74.2.

Bloomberg users were less optimistic on the outlook for their equity markets in the next six months amid concern gains may not be sustained. The global equity rally has added about $17.5 trillion to the value of stocks worldwide since this year’s low on March 9. Respondents in Japan and the U.S. expect shares to decline, while those in the U.K. and Brazil predict their markets will extend their advances.

“Stock markets have become extremely frothy, people think equity prices are a little ahead of the world economic recovery,” Rupkey of Bank of Tokyo-Mitsubishi UFJ said. “It’s a natural place to pause and take stock.”

The U.S. dollar may weaken further in the next six months against the world’s most actively traded currencies, with sentiment at an 18-month low. Gold prices exceeded $1,000 an ounce this month as the dollar declined, bolstering demand for the precious metal as an alternative investment. The dollar confidence index fell to 30.8 from 38.8 in August.

Stronger Yen

Users in Japan expect the yen to strengthen against the dollar, with the index rising to 62.1 from 50.3. Most respondents in western Europe are less optimistic on the euro’s appreciation against its U.S. counterpart.

Survey participants in Japan and some western European nations are also less confident short-term interest rates will rise in the next six months, the survey showed. The Australian central bank this month said it was seeking to avoid “prematurely tightening” monetary policy after leaving rates unchanged for a fifth meeting.

“It’s very sensible on the part of officials to keep policies loose, and it will probably stay that way for an extended period of time,” Hui of Standard Chartered said. “Any inflationary threat is still a long way away and economies need all the help they can get.”

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