European Market Update

Daily Forex Fundamentals | Written by Trade The News | Feb 16 09 11:16 GMT |

European sovereign spreads rise on Eastern European concerns; Russian Industrial Production slumps ECONOMIC DATA (SP) Swedish Dec House Transactions: -26.0 % v -35.6% prior (SW) Swedish Jan Avg House Prices: SEK1.924M v SEK1.789M prior (NO) Norwegian Jan Trade Balance: NOK v NOK28.9Be (TU) Turkey Jan Consumer Confidence: 71.6 v 69.9 prior (TU) Turkey Nov Unemployment Rate: 12.3% v 10.9% prior, highest since 2005 (HU) Hungary Dec Final Industrial Output M/M: -15.1% v -14.6% prior; Y/Y: -23.3% v -23.3% prior (RU) Russia Industrial Production M/M: -19.9% v 3.8% prior; Y/Y: -16.0% v 12.0%e SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM Equities: || Roche [ROG.SZ] Reportedly says Pegasys shows positive results in Hepatitis B patients || Hennes & Mauritz [HMB.SW] Reported Jan SSS -1% v -2.8%e || TNT [TNT.NV] Reported Q4 Net €207M versus expectations of €163Me. , Rev €2.93B v €3.02B consensus. It expected revenues to decline in 2009 as drop mail volumes to fall || Lloyds [LLOY.UK] UK Treasury Timms stated in a BBC interview that the UK was not considering nationalization of Lloyds at this time || Air France [AF.FR] Air France confirmed press speculation that it would postpone taking delivery of new planes by 2-3 years . the company stated that it was not canceling any orders and continued to expect delivery of A380 by the end of 2009 Speakers: China President Hu stated that the economic crisis was deepening || ECB's Tumpel-Gugerell stated that it encountered a significant economic slump in Q4. However, added that interest rate cuts enacted since since Oct have had a 'positive effect'. Noted that much has changed' since ECB issued 1% forecast for 2010 and noted that the ECB was currently reviewing 2009/10 forecasts || India to end fiscal 2008/09 with revenue deficit of INR2.41T; tax shortfall after steps to counter economic slowdown. Fiscal deficit had risen to 6% of GDP in 2008/09 from a planned 2.5%. || PBoC Advisor Fan: Policies should concentrate on reducing savings rate || Czech Fin Min confirmed economic stimulus package valued around CZK79B or 1.9% of GDP || German Bank Association stated that German GDP to fall 'at least' until summer 2009 noting that indicators suggest a significant drop in Q1 || Japan Fin Min Nakagawa denied that he will step down after meeting || China PBoC Advisor Fan stated that policies should concentrate on reducing savings rate. He noted that falling demand was driving down prices of commodities and that deflation might also hurt earnings of Chinese companies. On the bright side, he observed that falling prices to help increase consumption || Russia Fin Min Kudrin stated that no decision on budget has been made at this time and added that negotiations remained difficult. Looking to cut capex programs like construction || Japan MoF's Sugimoto commented that there were no current plans to seek further economic stimulus measures || German DIW Institute Revised lower its expectations for German GDP data. It now saw Q1 GDP down 1.4% compared to 0.8% contraction. For 2009 it forecasted that GDP would drop 'over' 3% y/y versus its prior view of a 1.1% contraction. || In Currencies: The EUR/USD remained in its 1.27 to 1.31 consolidation range but probed the lower end in the aftermath of the G7 summit. Dealers attribute the softer Euro to weekend press articles of potential sovereign debt defaults and Eastern European woes (See out Credit Crisis section for more details). Eastern European currencies were softer. The Hungarian forint edged down to a new multi-year against the US dollar after its industrial production data and the Czech Krouna slumped to multi-year lows as well. Dealers noting that a break of 1.27 in EUR/USD sets up for a test of the 1.23 level with some FX chartist noting a potential steeper decline towards the 1.10 area. || The JPY was modestly softer during the European session against the majors with USD/JPY holding below the 92 level and EUR/JPY sustaining gains above the 117 area. || RBA's Ryan: Decline in AUD is entirely appropriate || In fixed income Gilts have broadly tracked UK financial sector equity prices, reversing early weakness and moving into positive territory after a UK Treasury minister stated that nationalization of Lloyd's was not under consideration. This strength has spilled over into Germany with Bund futures touching February highs and approaching the 125 handle seen as a key level of technical resistance by traders. European perhiperal debt markets have come under renewed pressure after weekend reports in UK the press highlighted the challenges facing Ireland and Eastern Europe. The yield on the Spanish 10y is approaching a record high of 130bps over Bunds, the Irish 10y is back through 250bps over Bunds and the Greek 10y back through 290bps over bunds. In supply, Slovakia sold €40B in 2015 floating rate notes with the acution covered 13 times. In Energy: IEA's Tanaka commented that oil demand was expected to pick up in 2010 and warned OPEC on further supply cuts. He saw 2010 global oil demand rebounding +1M bpd. He added that a possible supply crunch could occur by 2013 if economy begins recovering in 2010 Credit Crisis: London Times reported that fears are mounting in which Ireland could default on its national debt. the article noted how the cost of buying insurance against Irish government bonds rose to record highs last Friday and the debt-market investors now rank Ireland as the most troubled economy in Europe. || Telegraph's Ambrose Evans-Pritchard noted that the failure to save East Europe would lead to a global meltdown. The article noted that Eastern Europe has borrowed $1.7T abroad, of which at least $400B is due to be refinanced in 2009 and commented that up to 60% of Polish mortgages were denominated in CHF. According to the article Russia 'has held 36% of its foreign reserves since August defending the Ruble' in what amounts to the largest run on a currency in history || NOTES The US market is closed for Presidents' Day. The weekend G7 summit produced no details in the G7 plan to combat global recession. The Chinese President commented that the economic crisis was worsening. The Japanese Q4 annualized GDP came in at -12.7%, the largest contraction since the 1974 oil embargo. Looking Ahead: US Markets closed for President Day holiday 8:30 (CA) Canadian Dec Manufacturing Shipments M/M: -5.3% expected v -6.4% prior 8:30 (CA) Canadian Dec International Securities Transactions: -C$1.4B expected v -C$4.3B prior 9:00 (UK) Bank of England's Bean speaks in Birmingham 9:40 (US) Fed's Duke speaks in Arizona 9:45 (US) ECB's Trichet to speak in Brussels Trade The News Staff Trade The News, Inc. Legal disclaimer and risk disclosure All information provided by Trade The News (a product of Trade The News, Inc. "referred to as TTN hereafter") is for informational purposes only. Information provided is not meant as investment advice nor is it a recommendation to Buy or Sell securities. Although information is taken from sources deemed reliable, no guarantees or assurances can be made to the accuracy of any information provided. 1. Information can be inaccurate and/or incomplete 2. Information can be mistakenly re-released or be delayed, 3. Information may be incorrect, misread, misinterpreted or misunderstood 4. Human error is a business risk you are willing to assume 5. Technology can crash or be interrupted without notice 6. Trading decisions are the responsibility of traders, not those providing additional information. Trade The News is not liable (financial and/or non-financial) for any losses that may arise from any information provided by TTN. Trading securities involves a high degree of risk, and financial losses can and do occur on a regular basis and are part of the risk of trading and investing.

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Pound Rises After Testing Support After U.K. Home Prices Dropped To A Record Low

Daily Forex Fundamentals | Written by DailyFX | Feb 16 09 11:10 GMT |

Talking Points Japanese Yen: Fails At 92.50 Pound: Home Price Fall To Record Low Euro: Finding Support At 1.2700 US Dollar: Markets Closed For President's Day Pound Rises after Testing Support After U.K. Home Prices Dropped To A Record Low The pound would fall to support at 1.4150 after the Rightmove House price index fell to a new annualized record low of -9.1%. Sterling would bounce from the price level rising over 100 bps to over 1.4260. Sterling start the day's trading with a 100 pip decline after the markets priced in the uneventful G-7 summit. The finance ministers and central bankers from the developed nations agreed that the global economy was in a 'severe' downturn and they vowed to do everything they could to stop the problem. However, the lack of a course on how to deal with the problem added to concerns and sparked risk aversion flows. The Confederation of British Industry has lowered its growth forecast for 2009 to -3.3% which would be the biggest contraction in almost 30 years. The inability of the BoE and other central banks to revive the credit markets has accelerated the downturn and prevented the housing market to stabilize which was the root of the problem. The central bank has forecasted more rate cuts and the possibility of quantitative easing. However, most of this may already be prices into the pound which has found solid support at 1.4150. Although, we may see another test of this level as we get closer to the next rate decision, the upside risks may be greater for sterling. The post G-7 fallout would sink the euro to a low of 1.2731 before finding support, but the single currency would only reach as high as 1.2791 before giving back its gains. 1.2700 will be a key level to watch as it has held as support since December 5th,2008, break below could lead to a sharp move lower with a test of 1.2500 likely. Additionally, the 20-Day SMA has remained as staunch resistance and the technical level is on a downward trajectory as it has fallen below 1.300 for the first time since mid December at 1.2948. Now that the ECB has al but assured another rate cut at their March meeting we may see the euro continue to trade heavy. The Yen price action during the overnight session demonstrates the lack of uncertainty in the markets. After a sharp fall to 91.32 the USD/JPY would shoot higher to 92.05. Japan's economy contracted the most since 1974 which added to the dour post G-7 sentiment. However, the pair's rise to 92.05 shows that markets are refraining from becoming too pessimistic with several stimulus packages from all the developed nations about to be unleashed. The President's day holiday should lead to a low volume day of trading as U.S. equity markets will be closed. However, be conscious that on such a day price action is susceptible to volatility as a few large buyers could impact price action. The dollar may continue to be supported by safe haven flows, following the dismal outlook by the G-7 for the global economy. The economic calendar isn't expected to provide any major event risk until Friday's CPI figures which may lead sentiment at the mercy of the broader themes. We could see equity markets rise now that fiscal stimulus plan has passed and trader snake their bets on the potential winners. The spike in risk appetite could weigh on the dollar. DailyFX Disclaimer Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

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Technical Analysis Daily: USD/JPY

Daily Forex Technicals | Written by iFOREX.bg | Feb 16 09 11:13 GMT |

USD/JPY 91.90 USD/JPY Open 91.45 High 92.25 Low 90.59 Close 91.88 Last week Dollar/Yen abruptly corrected downwards, after testing the resistance 92.25, but closed the week virtually unchanged. On the weekly chart the currency couple consolidated, but downward pressure on the USD/JPY continues to remain strong, while the pair remains under 92.25. On the daily chart there is a risk of double bottom being formed, but the risk of resuming the downward trend will be maintained till USD/JPY is under 92.30. On the 4 hour chart we have valid ascending channel, but further bullish scenario is limited by the upper trend line. This limited ascending scenario is supported by an overbought and downwards CCI, which indicates potential decreasing pressure. Strengthening under the 90.60 support will signal for the benefit of further reduction. Retention above 92.25 may provoke growth. Technical resistance levels: 92.25 93.05 94.25 Technical support levels: 90.55 89.30 88.00 Trading range: 92.00 - 91.40 Trend: Downward Sell at 91.90 SL 92.20 TP 91.50 iFOREX.bg Forecasts and Trading Signals http://www.zifx.com

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Currency Pair Daily Forecasts

Daily Forex Technicals | Written by Finotec Group | Feb 16 09 10:27 GMT |

EUR/USD Daily Technical Reports EUR/USD-market strategy can be a sell from the level 1.2750$ Technical oscillators supporting the bearish trend for the currency pair To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice the MACD lines after a bearish crossover below the zero line. In order to find the power of the market, we use RSI (Relative Strength Index).With RSI; we can determine that the market is in a bearish direction. USD/JPY Daily Technical Reports USD/JPY-market strategy can be a buy from the level 91.80 Technical oscillators supporting the bullish trend for the currency pair To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice the MACD lines after a bullish crossover above the zero line. In order to find the power of the market, we use RSI (Relative Strength Index).With RSI; we can determine that the market is in a bullish direction. GBP/USD Daily Technical Reports GBP/USD-market strategy can be a sell from the level 1.4250$ Technical oscillators supporting the bearish trend for the currency pair To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice the MACD lines after a bearish crossover below the zero line. In order to find the power of the market, we use RSI (Relative Strength Index).With RSI; we can determine that the market is in a bearish direction. USD/CHF Daily Technical Reports USD/CHF-market strategy can be a buy from the level 1.1680 Technical oscillators supporting the bullish trend for the currency pair To strengthen our analysis; we use many other indicators, starting with MACD (Moving Averages convergence divergence); we notice the MACD lines after a bullish crossover above the zero line. In order to find the power of the market, we use RSI (Relative Strength Index).With RSI; we can determine that the market is in a bullish direction. Finotec Group Inc. http://www.finotec.com/ Disclaimer: FINOTEC Tradings Market Commentaries are provided for informational purposes only. The information contained within these reports is gathered from reputable news sources and not intended as investment advice. FINOTEC Trading assumes no responsibility or liability from gains or losses incurred by the information herein.

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Forex Technical Analysis

Daily Forex Technicals | Written by DeltaStock Inc. | Feb 16 09 10:05 GMT |

EUR/USD Current level-1.2748 EUR/USD is in a broad consolidation, after bottoming at 1.2331 (Oct.28,2008). Technical indicators are rising, and trading is situated below the 50- and 200-Day SMA, currently projected at 1.3292 and 1.4721. Unfortunately, today's gap took away the bullish momentum and 1.2705 support is put on test again. We still do think, that this level will hold for now, at least for an intraday rise towards 1.2860. Resistance Support intraday intraweek intraday intraweek 1.2945 1.3092 1.2853 1.2746 1.2997 1.3328 1.2811 1.2547 USD/JPY Current level - 91.67 The pair has finalized its consolidation above 90.95 at 97.48 and the general downtrend has been renewed, targeting 79.86. Trading is situated below the 50- and 200-day SMA, currently projected at 107.61 and 105.76. With the recent peak at 92.13 the pair has tested again the 92.23 resistance and reversed on the lower frames, so intraday bias is negative for 90.73. Beyond 92.23 next resistance lies at 93.12. Resistance Support intraday intraweek intraday intraweek 92.12 93.12 90.73 87.12 92.23 97.48 89.53 83.01 GBP/USD Current level- 1.4187 The pair is in a larger corrective phase towards 1.60+, after bottoming at 1.3506. Trading is situated below the 50- and 200-day SMA, currently projected at 1.5505 and 1.8341. With a gap almost 100 pips, the bias is bearish, but keep in mind, that recent low at 1.4137 is a good support, followed by the important on the daily frame 1.4020-50 zone. Intraday we favor a minor uptrend towards 1.4360 in order to fill last night's gap, as a break above 1.4260 will confirm our idea. An eventual slide below 1.4137 will target the 1.4020-50 zone. Resistance Support intraday intraweek intraday intraweek 1.4260 1.4590 1.4137 1.4020-50 1.4365 1.5727 1.4050 1.3506 DeltaStock Inc. - Online Forex & Securities Broker www.deltastock.com RISK DISCLAIMER: These analyses are for information purposes only. They DO NOT post a BUY or SELL recommendation for any of the financial instruments herein analyzed. The information is obtained from generally accessible data sources. The forecasts made are based on technical analysis. However, Delta Stock’s Analyst Dept. also takes into consideration a number of fundamental and macroeconomic factors, which we believe impact the price moves of the observed instruments. Delta Stock Inc. assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person's reliance upon the information on this page. Delta Stock Inc. shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation, losses or unrealized gains that may result. Any information is subject to change without notice.

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Pakistan to Seek Additional $4.5 Billion IMF Loan

By Khaleeq Ahmed and Khalid Qayum

Feb. 16 (Bloomberg) -- Pakistan will seek a further $4.5 billion loan from the International Monetary Fund, warning that the country’s fight against terrorists is hurting the economy.

“We will ask the board of directors for the amount as the war on terror has caused serious economic problems,” Shaukat Tarin, the finance adviser to the prime minister, said yesterday in a telephone interview from Islamabad. The additional funds would boost the country’s total borrowing from the IMF to more than $12 billion, he said.

President Asif Ali Zardari is facing pressure from the U.S. to step up the fight against Taliban and al-Qaeda insurgents along the border with Afghanistan. The country has received about $10 billion in aid from the U.S. since 2001, when former president Pervez Musharraf became an ally in the global campaign against terrorism. Musharraf quit in August.

“The government should seek aid from the U.S. and not loan from the IMF as compensation for fighting terrorists,” said Muzzammil Aslam, an economist at KASB Securities Ltd. in Karachi. “The IMF loan can only be used for balance of payments and building foreign reserves. Before asking for more loans, the government needs to say how it will pay back.”

South Asia’s second-biggest economy got a $7.6 billion loan from the IMF in November, to be disbursed over 23 months, as it sought to avoid defaulting on its debt. The country got $3.1 billion as the first installment, boosting foreign-currency reserves held by the central bank to $6.9 billion in February from $3.45 billion four months ago.

Pakistan’s benchmark stock index rose 2.7 percent to 5776.73 today, posting the biggest two-day gain in six months.

Expanded Program

Pakistani and IMF officials began two weeks of talks in Dubai, United Arab Emirates, yesterday as part of a review for disbursing the second installment of the November loan program, Tarin said, without saying how much the country is spending on fighting militants.

Pakistan doesn’t want to negotiate new conditions with the IMF at the end of the 23 months for the additional funds it’s seeking, Tarin said. The country wants the new request to come under the existing program, he said.

“We have met all major conditions” set by the IMF, he said.

State Bank of Pakistan, the nation’s central bank, last month kept its benchmark interest rate unchanged at 15 percent as inflation in January slowed to an eight-month low of 20.52 percent. In November, the central bank had raised the key rate by two percentage points, the most in more than a decade, as part of conditions for the IMF loan.

‘Not the Time’

“It is not the time to borrow more,” KASB’s Muzzammil said. “It is time to consolidate the economy and adjust policies for pro-investment activities. The government needs to cut interest rates to boost businesses.”

Higher borrowing costs have dented growth in the $144 billion economy, which is predicted by the government to expand at the slowest pace in seven years after growing an average 6.8 percent in the past five years. Suicide attacks by militants in the past two years in reaction to the military operation in tribal regions has deterred foreign investment and hurt local companies including National Bank of Pakistan.

The government is targeting a budget deficit of 4.2 percent of gross domestic product this fiscal year ending June 30, from a decade-high of 7.4 percent last year. Pakistan’s rupee plunged 22 percent in 2008 against the dollar.

Pakistan completed its last IMF program in 2004 with a credit rating from Standard & Poor’s of B+, four levels below investment grade. S&P in December raised Pakistan’s rating one level to CCC+, or seven levels below investment grade, after the IMF loan.

To contact the reporter on this story: Khaleeq Ahmed in Islamabad at paknews@bloomberg.net; Khalid Qayum in Islamabad at kqayum@bloomberg.net

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Obama Opts Against ‘Car Czar’; Geithner, Summers to Head Team

By John Hughes

Feb. 16 (Bloomberg) -- President Barack Obama opted against naming a “car czar,” instead asking Treasury Secretary Timothy Geithner and White House economic adviser Lawrence Summers to head a task force on revamping the U.S. auto industry, according to people familiar with the decision.

Ron Bloom, a United Steelworkers union adviser and former Lazard Ltd. vice president, will join administration members on the team, according to the two people, who declined to be named because the announcement hasn’t been made publicly.

The task force puts an end to reports Obama would recruit a well-known figure from outside to serve as the so-called car czar. The president was under pressure to say who would handle the issue before tomorrow, when General Motors Corp. and Chrysler LLC must give progress reports on plans to restructure as a condition of $17.4 billion in U.S. Treasury loans.

“It’s going to be something that’s going to require sacrifice not just from the auto workers, but also from creditors, from shareholders and the executives who run the company,” senior White House adviser David Axelrod said yesterday on NBC’s “Meet the Press.”

After Congress failed to approve a bailout for the automakers, former President George W. Bush’s administration authorized loans Dec. 19. That effectively made the Treasury secretary the car czar, with responsibility for making sure the companies meet deadlines and authority to revoke the loans.

Geithner will remain Obama’s official “designee” to oversee the restructuring. The Treasury secretary will have authority to recall the aid if the automakers fail to show they have a plan by March 31 to become profitable.

Cabinet Departments

Representatives from Cabinet departments and White House offices will serve on the Presidential Task Force on Autos along with Bloom, who was described by administration officials as an expert in restructuring who also has experience in manufacturing and in working with unions.

Absent from the administration’s team is Steven Rattner, co- founder of private-equity firm Quadrangle Group LLC in New York. He had been under consideration for the post of car czar, people familiar with the matter said last month.

Members of Congress, automakers and industry analysts have spent weeks discussing who might be chosen from outside Washington to serve as the car czar and what expertise that person should bring to the task.

Democrats’ Letter

Five Senate Democrats, including Debbie Stabenow of Michigan, wrote a letter on Feb. 5 urging Obama to name an expert in manufacturing as part of a panel to help oversee the auto loans.

“This advisory group provides a tremendous opportunity to bring together our country’s greatest manufacturing leaders to help our domestic automakers create the vehicles and technology of the future,” the senators said in the letter.

Bloom, who will be a senior adviser at the Treasury, has experience with an issue at the heart of the restructuring -- health-care costs. Bloom helped negotiate the Goodyear Tire & Rubber Co. health-care fund, union spokesman Wayne Ranick has said. In 2005, Bloom met with UAW officials who were then evaluating GM’s request for health-care concessions.

Terms of the Dec. 19 loan agreements require GM and Chrysler to persuade the United Auto Workers to accept half of scheduled payments into a union-run retiree health-care fund next year in equity instead of cash.

Airline Pilots

Bloom counseled airline pilots in the $4.9 billion employee buyout of UAL Corp., parent of United Airlines. That 1994 deal included wage and work-rule concessions in exchange for 55 percent of the company.

He also helped steelworkers negotiate an agreement with Goodyear in 2003. The deal preserved 85 percent of union jobs at 12 U.S. plants in exchange for agreements on productivity improvements, health-care cuts and other issues to save Goodyear at least $1.15 billion.

The Presidential Task Force on Autos will include officials from the Treasury, Labor, Transportation, Commerce and Energy departments, as well as from the National Economic Council, the White House Office of Energy and Environment, the Council of Economic Advisers and the Environmental Protection Agency.

The industry’s preference for an overseer with a mastery of its workings and culture was voiced by Bill Ford, executive chairman of Ford Motor Co., on Jan. 11.

“It would be really helpful to have somebody in there who would take the time to have a deep understanding of our industry,” Ford said then at a dinner with reporters covering the Detroit auto show.

To contact the reporters on this story: John Hughes in Washington at jhughes5@bloomberg.net.

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Mexico Industrial Output May Drop Most Since 2002: Week Ahead

By Thomas Black

Feb. 16 (Bloomberg) -- Mexico’s industrial output probably fell the most in almost seven years in December as a U.S. recession curbed demand for exports, slowing sales at auto-parts maker Sanluis Corp. and plastic tube manufacturer Mexichem SAB.

Industrial production may have declined 5.7 percent from a year ago, the eighth consecutive decrease, according to the median estimate of eight analysts surveyed by Bloomberg. The government will report production, which includes manufacturing, construction, mining, electricity, water and gas, tomorrow.

Mexican companies and foreign factories that export to the U.S. are scaling back production and trimming payrolls amid a recession that began more than a year ago in the U.S., which bought 80 percent of Mexico’s $291.8 billion in exports in 2008. December exports to the U.S. dropped 19 percent from a year ago.

“It’s a crisis of great proportion,” said Edgar Franco, corporate treasurer for Sanluis, the largest maker of auto leaf springs in North America. “We still don’t know how deep it will be.”

The drop in demand from the U.S. will get worse before it improves, Franco said in a telephone interview. The Mexico City- based company expects sales and production volume to plummet 30 percent to 40 percent in 2009 from last year and is in a process of “re-sizing” to cope with the drop. Franco declined to give details about worker and production adjustments.

The economy will be weighed down by the auto and auto-parts industry, which makes up about 20 percent of Mexico’s industrial production and is tied mostly to the U.S. and Canadian markets. U.S. auto sales dropped to an annual rate of 9.6 million in January compared with an average for this decade of 16 million vehicles per year.

Auto Output

In December, Mexico’s auto production fell 3.5 percent to 122,753 cars and light trucks as exports, which make up 89 percent of output, fell 10 percent. The slide grew worse in January, with production plunging 51 percent to 81,533 vehicles, the nation’s Automobile Industry Association said.

The rapid deterioration of U.S. demand makes it difficult to forecast industrial production for 2009, Salvador Moreno, chief economist at ING Groep NV’s Mexican unit, said in an interview from Mexico City. His forecast of a 1.4 percent contraction in Mexico’s economy this year will probably have to be adjusted down, he said.

“There’s a manufacturing recession, and the auto industry is beat up quite a bit,” Moreno said. “There’s not a lot of surprise in all this. Mexico isn’t going to change substantially until the U.S. begins to give signals of stabilization.”

An accelerating decline in crude oil production, which is measured under the mining industry, continues to drag on industrial output. Petroleos Mexicanos, the Mexico City-based state-run oil monopoly, produced 2.72 million barrels a day in December, an 8 percent drop from a year ago, as it struggles to offset declines at its giant offshore field, Cantarell.

Infrastructure Spending

Mexichem Chief Executive Officer Ricardo Gutierrez said the last half of 2008 and the first half of 2009 will be a “lost year” for Mexican industrial companies.

Still, Mexichem and other companies that sell to the construction industry may get a boost from a pledge by President Felipe Calderon to spend a record 570 billion pesos ($40 billion) this year on roads, bridges, rail and other infrastructure.

“I am starting to feel very confident that the second half of the year will be as strong as the first of last year,” Gutierrez said in an interview Feb.13. The Mexico City-based company is the largest maker of plastic pipes in Latin America.

Mexichem’s sales may grow by at least 20 percent this year as demand picks up in the second half of the year, Gutierrez said.

The company doesn’t plan any production or employment cutbacks and may spend $400 million on acquisitions, almost double what it spent last year, even with a global credit crunch, Gutierrez said.

The past economic crises that Mexican companies endured in 1995 and 1982 were characterized by peso devaluations and plunging internal demand, allowing exporters to thrive by selling abroad. Companies such as Sanluis have few options for relief in this crisis because the global downturn has dried up export demand, Franco said.

Along with weakening demand, Mexican companies are battling a global credit crunch. Sanluis’s bankers are asking for guarantees from Mexico’s development bank on a $30 million revolving line of credit it uses for working capital, Franco said. Sanluis had sales of $503.4 million for the first nine months last year, a 7 percent decline from the same period in 2007.

“In the U.S., measures of support have been taken to reactivate, not only the automobile industry, but all consumption with credit and financing,” Franco said. “We’re hoping that here in Mexico the same will happen.”

Peso, Stocks, Bonds

Last week, Mexico’s benchmark Bolsa index fell 0.2 percent to 19368.10. Telefonos de Mexico SAB, the country’s largest fixed-line telephone company, declined 9.3 percent during the week after reporting on Feb. 9 that fourth-quarter net income fell 64 percent to 2.98 billion pesos. Wal-Mart de Mexico SAB, the country’s largest retailer, gained 2.2 percent after a 4.5 percent gain in fourth-quarter net income beat analysts’ estimates.

Yields on Mexico’s benchmark bond due December 2024 rose 12 basis points, or 0.12 percentage point, to 8.23 percent. The bond’s price fell 1.16 centavos from the previous week to 115.58 centavos per peso, according to Banco Santander.

The peso weakened 2.5 percent to 14.5585 per U.S. dollar, compared with 14.1986 on Feb. 6. The currency closed at a record low of 14.5708 on Feb. 3.

The following is a list of events in Mexico next week:

Event Date Forecast Industrial production for December Feb. 17 -5.7% Central Bank overnight rate Feb. 20 7.25% GDP for fourth quarter Feb. 20 -1.5% Oil production for January Feb. 20 --

To contact the reporter on this story: Thomas Black in Monterrey, Mexico, at tblack@bloomberg.net.

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Consumer Prices Probably Fell in January: U.S. Economy Preview

By Shobhana Chandra

Feb. 16 (Bloomberg) -- Consumer prices in the U.S. probably posted their first annual decline since 1955 and new home construction fell further in January, economists said before reports this week.

The cost of living probably dropped 0.1 percent in the 12 months to January, according to the median forecast in a Bloomberg News survey ahead of Labor Department figures due on Feb. 20. A Commerce Department report two days earlier may show builders broke ground on the fewest houses since record-keeping began in 1959, a separate survey indicated.

The Labor report may renew concern among some Federal Reserve officials about the risk of prolonged declines in prices, which erode profits and make debts harder to repay. The housing figures will underscore the difficulty President Barack Obama will have in arresting the industry’s three-year slump.

“Given the rising odds of deflation, there’s certainly no pressure on the Fed to raise rates and it gives them the green light for further credit easing,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. Meantime, housing is unlikely to recover in the first half of the year, he said.

Obama will unveil his strategy to stem the mortgage crisis the same day as the housing-starts figures. The focus of the plan will be to cut monthly payments to help keep struggling borrowers in their homes, aides said.

Summers Warning

Lawrence Summers, director of the White House’s National Economic Council, said last week it will take a while for the $787 billion fiscal stimulus and a financial-rescue plan to have an impact, warning that the economy’s slump will probably continue “for some time.”

Summers also signaled, in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” that the administration is open to spending more than the $50 billion allocated so far to aid the mortgage market.

The Standard & Poor’s 500 Supercomposite Homebuilding Index lost 11 percent last week. Centex Corp., the second-biggest American homebuilder, dropped 23 percent to $8.54.

Builders are under pressure as a glut of available homes depresses the housing market. The Commerce report may show that new-home starts in January dropped to a 530,000 annual rate, according to the Bloomberg survey. Permits, a sign of future construction, probably also declined to a record low.

Taking a Toll

Toll Brothers, the largest U.S. luxury homebuilder, said last week that first-quarter revenue plunged 51 percent.

“The past five months have been among the most difficult in U.S. economic history,” Chief Executive Officer Robert Toll said during a Feb. 11 conference call.

A deepening recession has forced retailers from Macy’s Inc. to AnnTaylor Stores Corp. and Kohl’s Corp. to offer discounts of as much as 70 percent to clear out merchandise.

The Labor report may show that the overall cost of living climbed 0.3 percent in January from December, the first gain in six months, according to economists surveyed. The average cost of regular gasoline rose 10 cents to $1.79 a gallon last month from December, according to AAA. Core consumer prices, excluding food and fuel, likely rose 0.1 percent after no change in December.

Labor’s report on producer prices, scheduled for Feb. 19, may show wholesale prices fell 2.5 percent last month from a year earlier, according to the Bloomberg survey median.

Deflation Risk

Economists are worried the deceleration in prices, or disinflation, may lead to outright deflation. The level of Fed policy makers’ concern about the economic downturn and its pressure on prices will be reflected in minutes of their January meeting, due on Feb. 18.

“Excess economic slack is posing a significant risk of deflation,” Deutsche Bank Securities Inc. economists Joe LaVorgna and Carl Riccadonna in New York wrote in a Feb. 13 report. “Inflation could fall to uncomfortably low levels.”

A Fed report on Feb. 18 may show industrial production fell 1.5 percent in January, the fifth drop in six months, according to another Bloomberg survey. The slump in manufacturing may also be highlighted in Fed reports from the New York region, due on Feb. 17, and the Philadelphia area two days later.

Automakers General Motors Corp. and Ford Motor Co. are slashing production and jobs, and Caterpillar Inc., the world’s largest maker of bulldozers, is scaling back.

Among other reports this week, the Conference Board’s index of leading economic indicators was likely unchanged in January after a 0.3 percent gain, economists predict. The gauge, which points to the direction of the economy, is due on Feb. 19.

                         Bloomberg Survey

================================================================= ==============

Release Period Prior Median Indicator Date Value Forecast ================================================================= ============== Empire Manu. Index 2/17 Feb. -22.2 -23.8 Net Long Term TICS $ Bl 2/17 Dec. -21.7 20.0 Total TICS $ Blns 2/17 Dec. 56.8 30.0 NAHB Housing Index 2/17 Feb. 8 8 ABC Conf Index 2/17 Feb. 16 -53 -53 MBA Mortgage Applic 2/18 Feb. 14 -24.5% n/a Import Prices MOM% 2/18 Jan. -4.2% -1.0% Import Prices YOY% 2/18 Jan. -9.3% -11.2% Housing Starts ,000’s 2/18 Jan. 550 530 Building Permits ,000’s 2/18 Jan. 547 525 Ind. Prod. MOM% 2/18 Jan. -2.0% -1.5% Cap. Util. % 2/18 Jan. 73.6% 72.4% PPI MOM% 2/19 Jan. -1.9% 0.2% Core PPI MOM% 2/19 Jan. 0.2% 0.1% PPI YOY% 2/19 Jan. -0.9% -2.5% Core PPI YOY% 2/19 Jan. 4.3% 3.8% Initial Claims ,000’s 2/19 Feb. 7 623 620 Cont. Claims ,000’s 2/19 Jan. 31 4810 4818 LEI MOM% 2/19 Jan. 0.3% 0.0% Philly Fed Index 2/19 Feb. -24.3 -25.0 CPI MOM% 2/20 Jan. -0.7% 0.3% Core CPI MOM% 2/20 Jan. 0.0% 0.1% CPI YOY% 2/20 Jan. 0.1% -0.1% Core CPI YOY% 2/20 Jan. 1.8% 1.5% Core CPI SA Index 2/20 Jan. 216.816 n/a CPI NSA Index 2/20 Jan. 210.228 211.081 ================================================================= ==============

To contact the reporter on this story:
Shobhana Chandra in Washington at
schandra1@bloomberg.net

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U.K. Economy to See Worst Slump Since 1980, CBI Says

By Svenja O’Donnell

Feb. 16 (Bloomberg) -- The U.K. economy will shrink at almost twice the pace previously forecast this year as the credit famine plunges the nation deeper into the worst recession in almost 30 years, the Confederation of British Industry said.

Gross domestic product will contract 3.3 percent, instead of the 1.7 percent predicted in November, the biggest U.K. business lobby said today. By the end of 2009, the economy will have contracted for six consecutive quarters, it said.

“The world has changed dramatically,” Richard Lambert, the CBI’s director general, told reporters in London. “Faced with a global confidence crisis, a rapid fall in demand and credit constraints, U.K. firms have been forced to scale back investments and cut jobs.”

Prime Minister Gordon Brown has pledged billions of pounds to revive lending as a housing slump deepens and job losses mount. The CBI expects the economy to shrink 4.5 percent from the start of the recession in the third quarter of last year, only slightly less than in the early 1980s slump during Margaret Thatcher’s first term. Output will stagnate in 2010, it said.

Government net borrowing will balloon to 148.7 billion pounds ($211 billion) in the next financial year, or 10.6 percent of GDP, and then rise to 11.8 percent of GDP the following year, the CBI said in the forecasts. Chancellor of the Exchequer Alistair Darling said in November that borrowing would be 8 percent of GDP in the year ending March 2010.

Housing Slump

As banks rationed loans, home values slumped. The average price advertised by sellers in February recorded the biggest annual fall since at least 2002, declining 9.1 percent to 216,163 pounds, Rightmove Plc said today. In London, they fell 3.5 percent. Mortgage approvals stayed close to a decade-low in December, the Bank of England said on Jan. 30.

Enquiries from potential buyers are “being blunted by the mortgage famine,” Miles Shipside, Rightmove’s commercial director, said in a statement. “The financial sector needs to put its house in order before market recovery can truly begin.”

Still, asking prices in the U.K. rose 1.2 percent over the month, led by the West Midlands, Rightmove said. In London, they grew 0.3 percent.

House prices will probably decline 15.5 percent this year, the CBI said. Rightmove forecasts a 10 percent drop.

Unemployment will rise to more than 3 million by the second quarter of 2010, up from 1.97 million at the end of last year, according to the CBI. The inflation rate will drop to 0.1 percent in the third quarter of this year, the CBI said.

The recession will damage Britain’s long-term growth prospects, Oxford Economics said in a report today. GDP will grow 2.1 percent a year on average between the second half of 2006 and the final two quarters of 2018, compared with an average 2.9 percent expansion in the previous economic cycle, the report showed.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net.

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Nakagawa Says He Won’t Resign After Meeting Aso

By Tatsuo Ito

Feb. 16 (Bloomberg) -- Japan’s Finance Minister Shoichi Nakagawa said he wasn’t planning to resign following calls for him to step down after he denied he was drunk at a Group of Seven press conference in Rome.

Nakagawa was speaking to reporters in Tokyo today after meeting with Prime Minister Taro Aso. Aso called on Nakagawa to remain in his post, the finance chief said.

Nakagawa earlier told lawmakers he had slurred his speech because he had taken double the prescribed dose of medicine at a meeting of finance ministers and central bankers on Feb. 14. The minister appeared to have difficulty understanding questions when addressing reporters after the gathering.

“I took a little more medicine than prescribed,” Nakagawa said at parliament, adding that he had “a sip” of wine earlier at a luncheon. He told reporters outside his home earlier today he “wouldn’t drink before a G-7 meeting” in remarks broadcast by Asahi Television.

Opposition lawmakers will table a motion for Nakagawa to resign as soon as tomorrow, Kyodo News reported, without citing where it obtained the information.

“He has been doing an incredibly good job, and I am grateful for that,” Aso told reporters today. “I told him to take good care of himself.”

Blow to Aso

The incident was the latest blow to Aso, whose popularity slid to the second-lowest on record for a leader. Aso’s approval rating fell to 9.7 percent in a Nippon television news survey from 17.4 percent, the poorest showing since the Yoshiro Mori administration in 2001, the broadcaster said. His disapproval rating climbed to 76.2 percent. Aso needs to call elections by September.

Japan’s economy shrank at an annual 12.7 percent pace last quarter, the most since the 1974 oil shock, a report by the Cabinet Office today showed.

To contact the reporter on this story: Tatsuo Ito in Tokyo at tito2@bloomberg.net

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Indonesia Grows at Slowest Pace in 2 Years on Exports

By Aloysius Unditu and Arijit Ghosh

Feb. 16 (Bloomberg) -- Indonesia’s economy expanded at the slowest pace in more than two years as the global recession crimped demand and reduced prices of the nation’s palm oil, rubber and electronics exports.

Southeast Asia’s biggest economy grew a less-than-estimated 5.2 percent in the fourth quarter from a year earlier after gaining a revised 6.4 percent in the previous three months, the statistics bureau said in Jakarta today. Economists surveyed by Bloomberg News had expected a 5.7 percent increase.

Japan’s economy, Indonesia’s biggest overseas market, last quarter shrank the most since the 1974 oil shock amid the world’s worst financial crisis since the Great Depression. Bank Indonesia may be under pressure to add to three interest-rate cuts in the past three months as the government estimates exports could rise in 2009 at the slowest pace in nine years.

“The situation is much worse than is being suggested by the numbers,” said Purbaya Yudhi Sadewa, chief economist at the Danareksa Research Institute in Jakarta. The central bank should lower its policy rate earlier in the year to spur the economy because “if the current trend continues, by the third quarter we will see negative growth,” he said.

Sadewa expects Bank Indonesia to reduce its key rate to 7.5 percent from 8.25 percent.

Palm Oil

PT Excelcomindo Pratama, the nation’s third-largest mobile- phone company, said its revenue from the country’s palm-oil producing regions may decline by as much as 10 percent because of a fall in exports of the commodity. Indonesia is the world’s largest producer of the edible oil.

“Our revenue will be hit quite significantly in those areas,” Excelcomindo’s President Director Hasnul Suhaimi said in an interview last week. “We expect there will be an impact in textile- and shoe-producing areas as well.”

Indonesia’s new-car sales fell for the first time in almost two years in January as slowing economic growth and higher loan rates last year damped demand.

Exports grew 1.8 percent last quarter from a year earlier, according to today’s report, the slowest pace since the three months ended June 2004. Overseas sales plunged 20 percent in December, the biggest drop in more than seven years.

“East Asian economies can’t rely so much on exports because even if the U.S. economy recovers it can’t grow rapidly,” Asian Development Bank President Haruhiko Kuroda said in an interview in Jakarta today. The U.S. needs “more savings, which means the consumption to GDP ratio will be smaller.”

Weaker Currency

The rupiah has dropped more than 6 percent this year, making it the worst-performing currency after the South Korean won among Asia’s 10 most-traded currencies outside Japan.

The rupiah fell 1 percent to 11,888 against the dollar at 2:28 p.m. The benchmark stock index, which rose as much as 0.6 percent, was up 0.1 percent after the announcement.

Japan’s gross domestic product shrank at an annualized 12.7 percent pace in the three months to Dec. 31, contracting for the third straight quarter, the Cabinet Office said today in Tokyo.

The economy in Indonesia, Asia’s third-most populated nation, expanded 6.1 percent last year, slowing from 6.3 percent growth in 2007, according to today’s statement. The economy shrank 3.6 percent in the fourth quarter from the previous three months.

To boost employment and consumer demand, President Susilo Bambang Yudhoyono’s government plans a 71.3 trillion-rupiah ($6 billion) stimulus package. That includes a plan to give tax breaks that will save individuals and companies 43 trillion rupiah in payments this year.

The government said it will also spend 15 trillion rupiah on discounts for electricity tariffs and public works, adding to a previous plan to outlay 12.5 trillion rupiah on a stimulus package meant to subsidize taxes and duties.

“Fiscal stimulus and monetary easing will have a sizeable impact,” ADB’s Kuroda said.

To contact the reporters on this story: Aloysius Unditu in Jakarta at aunditu@bloomberg.net; Arijit Ghosh in Jakarta at aghosh@bloomberg.net



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Geithner Pressed By G-7 to Move Fast on Bank Bailout

By Simon Kennedy and Rebecca Christie

Feb. 16 (Bloomberg) -- Finance chiefs from the Group of Seven nations joined the chorus of U.S. investors and lawmakers pushing Treasury Secretary Timothy Geithner to move faster to fix the banking system.

Stung by domestic criticism for failing to provide details last week on just how he plans to clean up banks’ toxic assets and revive lending, Geithner was told by foreign policy makers at weekend talks in Rome that speed was of the essence.

“A concrete U.S. plan would have positive spillover effects on markets and economies elsewhere,” said Marco Annunziata, chief economist at UniCredit MIB in London. “They are also probably hoping Geithner unveils the magic formula, which they could then also adopt.”

The G-7 finance ministers and central bankers want Geithner, 47, to tackle a U.S. credit crisis that lies at the heart of the worst global recession since World War II. Bank stocks, as measured by the Standard & Poor’s 500 Financials Index, have fallen 30 percent this year and ended last week lower than before Geithner presented his rescue plan on Feb. 10.

“The question is implementation and execution,” Bank of Canada Governor Mark Carney said in Rome on Feb. 14 after Geithner’s first trip abroad as Treasury secretary. “It is a comprehensive plan, the intent is there, the will is there.”

‘Second Wave’

The G-7 said the “severe” downturn will persist through 2009 and International Monetary Fund Managing Director Dominique Strauss-Kahn predicted a “second wave” of nations will ask for emergency cash as state finances crumble.

As German Finance Minister Peer Steinbrueck complained that the U.S. was the “departure and focal point” of the slump, a U.S. official in Rome promised more information on Geithner’s intentions within weeks. President Barack Obama will this week unveil his strategy to end the housing slump.

“We are going to move quickly to lay out a broad design,” Geithner said in Rome. The G-7 officials will gather again in the U.K. next month for a meeting of the Group of 20, which includes the largest emerging nations such as China, India and Brazil.

Economic prospects are still deteriorating. Japan’s economy, the world’s second largest, shrank at an annual 12.7 percent pace in the fourth quarter, the most since the 1974 oil shock, the government said today. Companies from Microsoft Corp. to Nissan Motor Co. are cutting jobs, U.S. stocks fell last week by the most since November, and the World Bank said Feb. 13 the crisis may kill as many as 400,000 more babies every year until 2015 as poverty spreads.

Priority Is Stability

“The stabilization of the global economy and financial markets remains our highest priority,” the G-7 officials said after their meeting. They forecast the full effect of individual rescue packages will “build over time.”

The group said it rejected protectionism even amid signs some of its members are shielding their industries to the detriment of rivals. The statement softened previous calls for China to accelerate gains in its currency by saying it welcomed the country’s steps to bolster growth. That should help “lead to a continued appreciation” of the yuan, the G-7 said.

“This is clearly friendlier language with a toned down emphasis on the need for further appreciation,” said Ronald Leven, a currency strategist at Morgan Stanley in New York. “This gives the Chinese some latitude to allow the currency to remain stable.”

Geithner won over some foreign colleagues this weekend who had previously expressed confusion over how exactly he plans to fix the U.S. banking system.

‘Looks Great’

French Finance Minister Christine Lagarde, who arrived saying she was “very impatient” for more details, said Geithner answered questions “very clearly.” Steinbrueck, who clashed with the previous U.S. administration over regulating the financial industry, suggested Geithner is more aligned with his views.

Geithner’s plan “looks great,” said Lagarde. “The essential thing is now to implement it.”

The strategy involves injecting fresh government capital into some of the biggest U.S. institutions, starting a program of up to $1 trillion to promote new lending to consumers and businesses, and establishing a public-private partnership to buy tainted assets.

Geithner had a challenge for the rest of the G-7, too, urging them to follow the U.S.’s lead in enacting aggressive policies to rally their economies. The G-7 meeting took place as the U.S. Congress gave final approval to a $787 billion economic stimulus package.

‘Greater Urgency’

“Given the severity of the current economic and financial environment, these actions must be forceful and sustained for a period that matches the likely duration of the crisis,” Geithner said. He noted “a much greater scale of urgency and commitment” within the G-7.

Still, European Central Bank policy makers at the meeting signaled they are in no rush to follow the Federal Reserve in pursuing more non-conventional monetary policies. Carney said in an interview that the relative strength of Canada’s banks meant recent interest-rate cuts will be more effective there than elsewhere.

Aside from the yuan, which Geithner said less than a month ago was being “manipulated,” the G-7 made no mention of other currencies, papering over differences sparked by a weaker pound and stronger yen. The group repeated its traditional message that “excess volatility” in exchange rates must be avoided.

The yen climbed to 91.64 against the dollar as of 7:19 a.m. in London from 91.93 late in New York on Feb. 13. The pound fell 1.2 percent to $1.4178.

“The overall tone appeared to serve the principal aim of not generating additional market volatility,” said Thomas Stolper, an economist at Goldman Sachs Group Inc. in London.

The G-7 tasked its aides with delivering a report within four months on common principles and standards on the “propriety, integrity and transparency” of the world economy and markets. The G-20 next month will push ahead with new rules to govern finance.

“This is of capital importance,” Italian Finance Minister Giulio Tremonti said in an interview.

To contact the reporter on this story: Simon Kennedy in Rome at skennedy4@bloomberg.net

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Japan Economy Shrinks 12.7%, Steepest Drop Since 1974 Oil Shock

By Jason Clenfield

Feb. 16 (Bloomberg) -- Japan’s economy shrank at an annual 12.7 percent pace last quarter, the most since the 1974 oil shock, as recessions in the U.S. and Europe triggered a record drop in exports.

Gross domestic product fell for a third straight quarter in the three months ended Dec. 31, the Cabinet Office said today in Tokyo. The median estimate of 26 economists surveyed by Bloomberg News was for an 11.6 percent contraction.

Exports plunged an unprecedented 13.9 percent from the third quarter as demand for Corolla cars and Bravia televisions collapsed amid a slump that the Group of Seven nations said will persist for most of 2009. Toyota Motor Corp., Sony Corp. and Hitachi Ltd. -- all of which forecast losses -- are firing thousands of workers, heightening the risk a decline in household spending will prolong the recession.

“The economy is in terrible shape and the scary part is that we’re likely to see a similar drop this quarter,” said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. “All we can do is wait for overseas demand to pick up.”

The Nikkei 225 Stock Average fell 0.4 percent at the close in Tokyo, extending the year’s losses to 13 percent. The yen rose to 91.59 per dollar from 91.76 on speculation Japan will refrain from taking measures to weaken the currency. The yen’s 18 percent gain over the past year has compounded exporters’ woes by eroding the value of their overseas sales.

Worse Than U.S., Europe

The world’s second-largest economy shrank 3.3 percent from the third quarter, today’s report showed. That compared with the U.S.’s 1 percent contraction and the euro-zone’s 1.5 percent decline, which was the sharpest in at least 13 years.

“There’s no doubt that the economy is in its worst state in the postwar period,” Economic and Fiscal Policy Minister Kaoru Yosano said in Tokyo. “The Japanese economy, which is heavily dependent on exports of autos, electronics and capital goods, has been severely hit by the global slowdown.”

G-7 finance chiefs meeting in Rome last weekend vowed to tackle a “severe” economic downturn. Indonesia grew 5.2 percent in the fourth quarter from a year earlier, the slowest pace in more than two years, the government said in Jakarta today.

Japan has been in a recession since November 2007, according to a government panel that dates the economic cycle. The Sept. 15 bankruptcy of Lehman Brothers Holdings Inc. worsened a credit crisis that erased more than $14 trillion from global equity markets and paralyzed world trade.

Yosano said the government has no plans to compile additional stimulus measures before next fiscal year’s budget is passed. Parliamentary gridlock has blocked the passage of Prime Minister Taro Aso’s 10 trillion yen ($111 billion) package, helping his popularity slide ahead of elections due by September.

Unpopular Aso

Aso’s approval rating fell to 9.7 percent, the poorest showing since the Yoshiro Mori administration in 2001, according to a Nippon Television news survey.

The Bank of Japan, which in December cut its key interest rate to 0.1 percent, is trying to get credit flowing by purchasing shares and corporate debt from lenders. It has little means to address what analysts say is the economy’s central problem: a lack of overseas demand.

Net exports -- the difference between exports and imports -- accounted for 3 percentage points of the 3.3 percent quarterly drop in GDP.

Japan has become more dependent on sales abroad for growth over the past decade. Overseas shipments make up 16 percent of the economy today compared with about 10 percent in 1999.

“Japan produces high-end durable goods, which are very, very sensitive to credit conditions,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “People normally borrow to buy these things. In that sense, too, Japan was vulnerable.”

Spending Less

Domestic demand, which includes spending by households and companies, made up 0.3 percentage point of the contraction.

Capital investment fell 5.3 percent. Manufacturers cut production by a record 11.9 percent in the quarter, indicating they have little need to buy equipment as factories lay idle. Consumer spending, which accounts for more than half of the economy, dropped 0.4 percent, as exporters fired workers.

Panasonic Corp., Pioneer Corp., Nissan Motor Co. and NEC Corp. announced a combined 65,000 job cuts in the past month. The eliminations may have pushed the recession into a “new phase” in which consumers become more defensive and spend less, according to Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo.

Sentiment among households is close to the lowest level in at least 26 years. The jobless rate surged to 4.4 percent in December from 3.9 percent, the biggest jump in four decades.

“The best we can expect for this year is to see the collapse stop,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo. For Japan to recover, “we’ll need the U.S. and Chinese economies to take off first.”

Without adjusting for inflation, Japan shrank 1.7 percent from the previous quarter, less than the 2.1 percent analysts estimated. The GDP deflator, a broad measure of price changes, rose 0.9 percent, the first increase in a decade.

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net

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