Japan Recession Deepens as Factory Output Plunges

By Jason Clenfield and Toru Fujioka

Feb. 27 (Bloomberg) -- Japan’s manufacturers cut production by a record 10 percent in January and household spending plunged, adding to evidence that the economy in its worst recession in 60 years.

The month-on-month decline in factory output exceeded December’s record decline of 9.8 percent, the Trade Ministry said today in Tokyo. Household spending fell 5.9 percent from a year earlier, the biggest drop in more than two years.

Competition for jobs intensified as the number of positions on offer slid the most in more than 16 years. A collapse in exports is forcing companies to retrench: Toyota Motor Corp. cut output last month at the fastest pace in two decades and Advantest Corp., Japan’s biggest maker of memory- chip testers, said this week it will fire 1,200 workers.

“It’s an awful picture,” said Dwyfor Evans, a strategist at State Street Global Markets in Hong Kong. “There’s obviously a huge burden in terms of Japan’s export sector, and it’s having a real impact on the domestic sector as well.”

The yen rose to 97.48 per dollar as of 12:10 p.m. in Tokyo from 98.38 before the reports were published, on speculation the currency’s 4.2 percent decline this week was overdone.

The benchmark Topix stock index rose 0.6 percent at the lunch break, led by resource companies as oil prices gained, paring the year’s losses to 13 percent. Transport and machinery indexes fell 1.1 percent and 1.2 percent, respectively.

Region’s Woes

Other Asian economies are also suffering as the global recession saps demand for exports. Singapore shrank the most in at least 33 years last quarter, and analysts surveyed by Bloomberg expect figures today will show the Indian economy grew at the slowest pace since 2004 in the same period.

Japan’s gross domestic product shrank at an annual 12.7 percent pace in the final three months of 2008, the most since the 1974 oil shock. Exports plunged a record 45.7 percent last month, prompting analysts to say the economy won’t do any better this quarter.

The recession that began in November 2007 has put thousands out of work and parliamentary gridlock has prevented Prime Minister Taro Aso’s government from passing stimulus measures needed to spur domestic spending and protect jobs.

The ratio of positions available to each applicant slid the most since 1992 in January, dropping to 0.67 from 0.73, the Labor Ministry said today. The unemployment rate unexpectedly fell to 4.1 percent from 4.3 percent as housewives got part- time work to supplement declining incomes, said Koji Katoh, the statistics bureau’s director of labor statistics.

Extreme Adjustment

“The level of output adjustment is so extreme that the drop in the jobless rate is immaterial; we’ll see it rise eventually,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. “Japan’s economy will remain miserable.”

Consumer prices failed to rise in January for the first time in more than a year as households cut spending, the statistics bureau said today, indicating deflation may resurface in the world’s second-largest economy.

“Consumption has gotten off on a bad start in the first quarter,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “Domestic demand is going to be weak for quite some time.”

Advantest said this week it will fire 1,200 workers by March because it expects to lose money this year. Advantest, Nissan Motor Co. and Pioneer Corp. have announced more than 30,000 job cuts this month.

Production will decline a further 8.3 percent this month before rebounding 2.8 percent in March, according to companies surveyed by the Trade Ministry. If the forecasts materialize, output will tumble a record 22.4 percent in the first quarter.

Exhausting Stockpiles

Still, companies have been paring output faster than demand has fallen to exhaust stockpiles. Inventories fell 2 percent in January, the first drop in five months.

“Given how radical the production cutbacks have been, we could hit bottom soon,” said Kiichi Murashima, chief economist at Nikko Citigroup Ltd. in Tokyo.

Nippon Steel Corp. said this week output should pick up next quarter because customers have used up their stockpiles. Nissan, Japan’s third-largest automaker, said yesterday it will raise domestic production next month while Toyota Motor Corp. plans to increase manufacturing in May as it unveils new models.

Even so, higher output won’t signal an economic recovery, analysts say.

“You’re going to a short-term pickup but activity will still be very depressed,” said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo.

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

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Asia’s Economies Stumble as Global Slump Hits Exports

By Michael Dwyer

Feb. 27 (Bloomberg) -- Japan’s manufacturers cut production by a record in January and the Indian economy grew last quarter at the weakest pace since 2003 as Asia’s export-reliant nations are pummeled by the global recession.

Japanese industrial output plunged 10 percent last month from December, the Trade Ministry said today in Tokyo. India’s gross domestic product expanded 5.3 percent in the three months to Dec. 31 from a year earlier, less than the 6.1 percent expected by economists surveyed by Bloomberg, the statistics agency said in New Delhi.

“The region is suffering from an unprecedented decline in growth as a collapse in exports feeds through to domestic demand,” said Nicholas Bibby, an economist at Barclays Plc in Singapore. This will place “increased emphasis on the fiscal channel as governments try to stabilize their respective economies,” he said.

Asia is being hit hard by the global economy’s worst crisis since the Great Depression as it is almost twice as reliant on exports as the rest of the world. That’s prompted Asian governments to unveil fiscal stimulus packages worth almost $700 billion to kick-start local consumer and business spending.

The MSCI Asia Pacific Index of stocks has fallen 16 percent this year, its worst start to a year since 1990, as companies from Toyota Motor Corp. to Creative Technology Ltd. forecast record losses and announce plans to eliminate jobs.

Currencies Fall

Asian currencies declined this month, with South Korea’s won slumping to an 11-year low and the Indian rupee dropping to a record today, on concern sliding exports and shrinking economies will deter foreign investment.

Japan’s overseas sales plunged 45.7 percent in January from a year earlier, adding to evidence that Asia’s biggest economy is in its deepest slump in 60 years. Singapore shrank the most in at least 33 years last quarter and Hong Kong’s exports plunged by the most in 50 years in January.

Central banks from Tokyo to Mumbai have responded to weakening growth by slashing interest rates, with borrowing costs in India reduced to record lows and the Reserve Bank of Australia’s overnight cash rate at the lowest level in 45 years.

Bank Negara Malaysia on Feb. 24 reduced its benchmark rate for a third straight meeting to 2 percent, aiming to bolster an economy that policy makers said faces an increasing risk of contracting this year. The economy last posted an annual decline in 1998.

Thailand, Malaysia

Thailand’s central bank on Feb. 25 lowered its key policy rate by 50 basis points to 1.5 percent, adding to its most aggressive cuts ever.

Figures due to be released today are forecast by economists surveyed by Bloomberg News to show Malaysian growth weakened in the fourth quarter.

Malaysia’s economy probably expanded 1.5 percent last quarter, the weakest pace since 2001, according to the median forecast of 17 economists surveyed by Bloomberg. Southeast Asia’s third-largest economy may shrink 4 percent in 2009, Nomura Holdings Inc. said last week, which would be the worst performance in 11 years.

Some Asian economies are already in recession.

Hong Kong’s economy shrank a seasonally adjusted 2 percent in the fourth quarter from the previous three months, the government reported Feb. 25. That was the third straight quarter-on-quarter contraction. Hong Kong’s slump is deeper than during 2003, when severe acute respiratory syndrome killed 299 people in the city.

Record Low

Japan’s economy shrank last quarter by the most since the 1974 oil shock, and record collapses in exports and production in January suggest the economy won’t do any better in the first three months of this year.

The Taiwanese economy contracted an unprecedented 8.36 percent in the fourth quarter from a year earlier, prompting the island’s central bank to cut interest rates to a record low.

The South Korean economy is headed for its first recession in a decade as sales of Korean-made cars, consumer electronics and semiconductors to Europe, the U.S. and China dry up.

South Korea’s economy shrank 5.6 percent last quarter, the steepest decline since 1998. Industrial production fell an unprecedented 18.6 percent in December and Asia’s fourth-largest economy lost 103,000 jobs last month, the biggest drop in more than five years.

Finance Minister Yoon Jeung Hyun on Feb. 10 said South Korea may contract about 2 percent this year, a reversal from the government’s prediction in December of 3 percent growth.

“The dynamics in Japan and South Korea and Taiwan are exactly the same: these are very cyclical markets dependent to a huge extent on external demand,” said Dwyfor Evans, a strategist at State Street Global Markets in Hong Kong. “That’s no longer there.”

To contact the reporter on this story: Michael Dwyer at Mdwyer5@bloomberg.net

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Curse of Quarterly Report Haunts Global Markets: William Pesek

Commentary by William Pesek

Feb. 27 (Bloomberg) -- The Americanization of Japan has been an objective of the U.S. Treasury for decades.

The push accelerated under President Bill Clinton’s tenure during the 1990s. Two of Clinton’s Treasury chiefs, Robert Rubin and Lawrence Summers, rarely missed an opportunity to urge Japan to be more Western -- more shareholder friendly, more transparent, more flexible.

There are signs U.S. officials are getting what they wanted, and it’s not necessarily a good thing.

Japanese are still shuddering at recent news that NEC Corp. is cutting 20,000 jobs, Nissan Motor Co. is axing 20,000 and Panasonic Corp. is firing 15,000. Layoffs at Bridgestone Corp., Pioneer Corp. and Toyota Motor Corp. also show how far Japan is moving away from lifetime employment.

All this firing differs from Sony Corp.’s move to cut 16,000 jobs in December. For Sony, it was a long overdue admission of overreach, bloat and how much the iPod set the company back. Recent layoffs seem more American in nature with panicked attempts to halt declines in stock prices.

It’s no fun being a public company today -- not with economies falling and credit markets seized up. Shareholders are demanding action from top executives, and so they are turning to staff cuts. The motivation for such moves seems clear enough: the next quarterly-earnings report.

It may be time to do away with this most cherished pillar of American-style capitalism.

Whacky Models

Among the common threads between blowups at Enron Corp. and Lehman Brothers Holdings Inc. are extreme short-term thinking and whacky compensation models. The U.S. system that lay in tatters encouraged creative accounting, such as overstating the value of assets, underplaying risks and hiding what you can’t explain off-balance sheet.

If executives didn’t need to impress investors every few months, they might be less inclined to take extreme risks or cook the books. Far from resulting in less transparency, a world without quarterly dramas might encourage steadier earnings and less financial hubris.

Anyone rolling their eyes at this train of thought may want to read “The Smartest Guys in the Room,” the 2003 book by Bethany McLean and Peter Elkind about Enron’s demise. Its account of the hows and whys of deep-frying corporate books is as valuable as ever while Wall Street burns.

Skewed Thinking

Even executives who aren’t engaging in fraud can let the pressures of quarterly reporting skew their thinking.

Japan began requiring all listed companies to report quarterly in 2003. Now, executives may be taking self-defeating steps they will regret five years from now. NEC, Nissan, Panasonic and others are helping spook consumers into a multiyear hibernation. Far from spending more, the nation’s 127 million people will be saving more aggressively.

Household frugality was one reason the recovery that ended recently was so modest. After the recessions and deflation of the 1990s and early 2000s, consumers kept their wallets closed. Companies didn’t want to share profits with workers.

Expect new levels of thriftiness now that Japan’s biggest names are firing workers, just like their U.S. peers. Far from expecting lifetime employment, a fast-increasing number of workers from Tokyo to Fukuoka would be happy with part-time jobs. Shedding tens of thousands of workers to score points with shareholders may cause long-term pain.

Many Sides

There are many sides to this argument. In some ways, Japanese companies are paying a price for not doing more to reduce excess and move jobs overseas to cheaper locales during the fat years. Japan hasn’t encouraged entrepreneurs to do their thing and create new jobs.

The most remarkable thing about Japan’s recession is how surprised Japan’s leaders are by it. The 46 percent plunge in exports in January produced a record trade deficit in a nation that has long prided itself on surpluses. Didn’t Japanese officials know the economy was completely reliant on U.S. demand?

Great things would come from companies adhering more to global standards and welcoming foreign investment. More international diversity in corporate board rooms and among large shareholders could shake up Japan Inc. for the better.

In a perfect world, reporting every few months forces accountability. Yet it also puts a disproportionate amount of focus on a 90-day period at the expense of the bigger picture.

Scoreboard Distraction

Hong Kong, for example, wants to implement quarterly reports from the current half-yearly system. One wonders if it’s beneficial to have executives in Asia’s ninth-largest economy constantly distracted by the scoreboard.

Half-yearly reporting -- or even yearly -- may create a more stable environment. As long as executives augment the void with credible updates here and there on profitability and risks, there would be less direct focus on share prices.

Investors might reward companies that voluntarily offer true insights into their health over ones that don’t. If the reality every six to 12 months doesn’t match the spin, the shares would be punished. Talk about letting the free markets work.

Asia needs to become more open to the financial world around it. Recent layoff announcements make you wonder if Japan is learning the wrong lessons from the West.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

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Korea East-West Power Seeks 72,000 Tons of Fuel Oil for April

By Yuji Okada

Feb. 27 (Bloomberg) -- Korea East-West Power Co., one of the six generating units of Korea Electric Power Corp., is seeking to buy between 30,000 metric tons and 72,000 tons of medium-sulfur fuel oil for delivery in April, said an official who asked not to be identified because of company policy.

The table below gives details of the purchase.

-----------------------------------------------------------
Products:     540-Centistoke fuel oil
Sulfur:       Maximum 2.5 percent
Quantity:     30,000-72,000 metric tons
Delivery:     April 6-10
Port:         Ulsan thermal power plant
Offers Close: 2 p.m. on March 6 Korean Time
-----------------------------------------------------------

The oil’s centistoke rating is a measure of its viscosity, or flow rate, when heated. Fuel oil with a higher centistoke rating has a slower flow rate.

To contact the reporter on this story: Yuji Okada in Tokyo at yokada6@bloomberg.net

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Oil Close Above 34-Day Mean May Spur Rally: Technical Analysis

By Will Kennedy

Feb. 26 (Bloomberg) -- New York oil may extend a three-day rally if it closes above $44.52, the 34-day moving average for the April futures contract, according to technical analysis by broker PVM Oil Associates Ltd.

“The technical pieces are falling into place for a further move up, but there’s still some heavy-duty resistance to be dealt with,” PVM said in its daily technical report for clients. “We need to clamber over the 34-day moving averages.”

Oil for April delivery rose 6.4 percent to $42.50 a barrel yesterday on the New York Mercantile Exchange, the highest close since Jan. 26. The chart shows prices have risen above 5-, 8- and 13-day moving averages for the April contract. Crude’s rise above $41.15, the peak reached during the run-up to the first Gulf War in 1990, is “constructive,” PVM said.

Today, oil for April rose as much as 1.7 percent to $43.24 a barrel. The contract traded at $43.04 at 10:20 a.m. London time.

For London’s Brent crude oil, the 34-day moving average for the April contract is $45.93. The contract rose as high as $44.95 today on the ICE Futures Europe exchange.

Traders use moving averages of closing prices over different periods to predict key levels of resistance and support for prices. Yesterday, consultant PetroMatrix GmbH said New York oil may rally if it closed above what was then its 50-day moving average of $40.25 a barrel.

To contact the reporter on this story: Will Kennedy at wkennedy3@bloomberg.net

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Idemitsu to Shut Chiba Refinery in Early April for Maintenance

By Michio Nakayama

Feb. 27 (Bloomberg) -- Idemitsu Kosan Co., Japan’s second- largest oil refiner, will shut its Chiba plant 10 days ahead of schedule to reduce petroleum stocks.

The company will close the 220,000 barrel a day refinery near Tokyo in early April for about 30 days, spokeswoman Maki Yasunaga said by phone from Tokyo.

To contact the reporter on this story: Michio Nakayama in Tokyo at mnakayama4@bloomberg.net

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Oil May Rise on OPEC Supply Cuts, Fuel Demand, Survey Shows

By Mark Shenk

Feb. 27 (Bloomberg) -- Crude oil futures may rise as OPEC production reductions begin to be felt in consuming countries and U.S. gasoline consumption increases.

Fifteen of 31 analysts surveyed by Bloomberg News, or 48 percent, said futures will increase through March 6. Ten respondents, or 32 percent, forecast oil prices will be little changed and six said that there will be a decline. Last week, 43 percent of analysts expected prices would fall.

The 11 members of the Organization of Petroleum Exporting Countries with quotas, all except Iraq, cut output 3.8 percent to 25.3 million barrels a day in February, consultant PetroLogistics Ltd. of Geneva said this week. Declining U.S. pump prices have spurred gasoline demand and cut inventories.

U.S. gasoline consumption averaged 9 million barrels a day over the past four weeks, up 1.7 percent from a year earlier, an Energy Department report on Feb. 25 showed. Supplies fell 3.32 million barrels to 215.3 million last week, the biggest reduction since September, according to the report.

“I am starting to believe in an upside in oil,” said Peter Beutel, president of Cameron Hanover Inc., an energy consulting company in New Canaan, Connecticut. “OPEC compliance at record levels, gasoline demand turning positive, seasonal factors” and a failure to break through a Dec. 19 low of $32.40 a barrel suggest a rally.

Crude oil for April delivery increased $5.19, or 13 percent, to $45.22 a barrel so far this week on the New York Mercantile Exchange. Prices have dropped 69 percent from the record $147.27 a barrel reached on July 11.

The oil survey has correctly predicted the direction of futures 48 percent of the time since its start in April 2004.

     Bloomberg’s survey of oil analysts and traders, conducted
each Thursday, asks for an assessment of whether crude oil
futures are likely to rise, fall or remain neutral in the coming
week. The results were:

                   RISE      NEUTRAL    FALL
                    15         10        6

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.

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Shenhua’s Australia Prospect May Boost Reserves by 6%

By Winnie Zhu

Feb. 27 (Bloomberg) -- China Shenhua Energy Co.’s coal prospect in Australia may boost reserves at China’s largest miner by at least 6 percent, according to the company’s annual report.

The 190-square kilometer block near Gunnedah in New South Wales state may hold 1 billion metric tons of high-quality power-station coal reserves, parent Shenhua Group Corp. said in a statement on the Web site of Beijing-based State-owned Assets Supervision and Administration Commission today.

Shenhua Energy has coal reserves of 18 billion tons, of which 7.3 billion are recoverable, according to the company’s 2007 annual report. The coal miner agreed in August to pay A$300 million ($194 million) for the right to the Australian prospect, its first foreign exploration permit.

“The potentially big reserve will have a positive effect on the company,” Donovan Huang, a coal analyst with Nomura Securities Ltd., said by telephone in Shanghai today.

Coal prices in China traded at 560 yuan a ton as Feb. 23, down from a record 995 yuan a ton reached in July last year.

Wonderful Sky Financial Group Ltd., which handles Shenhua Energy’s public relations, wasn’t immediately able to comment.

Shenhua’s Output

Shenhua said in April it intended to buy overseas assets, including mines in Australia, Indonesia or Mongolia to boost reserves and meet demand. Shenhua Energy has started risk appraisals on the Gunnedah project, according to today’s statement.

The Chinese company said Nov 20 that it may need to pay an additional A$200 million for the Australian mining lease.

Shenhua Energy increased coal production by 18 percent to 185.7 million tons last year, accounting for 7 percent of the nation’s total, it said in January.

The company’s shares fell 3.6 percent to HK$15.46 at the stock exchange’s midday break. The benchmark Hang Seng Index was up 0.17 percent.

To contact the reporter on this story: Winnie Zhu in Shanghai at wzhu4@bloomberg.net.

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BG Increases Offer for Pure as It Seeks Full Control

By Angela Macdonald-Smith

Feb. 27 (Bloomberg) -- BG Group Plc raised its offer for Pure Energy Resources Ltd. to A$1.03 billion ($667 million) and made the bid conditional on getting 90 percent of the stock as it seeks to thwart a rival offer from Arrow Energy Ltd.

The cash offer of A$8.25 a share, a 3.1 percent increase, is final in the absence of a higher bid, the U.K.’s third- biggest natural gas company said today in a statement. The move further boosts BG’s offer above the cash and stock bid by Brisbane-based Arrow, Royal Dutch Shell Plc’s Australian partner in coal-seam gas.

BG, Shell and Arrow are seeking more reserves to feed proposed liquefied natural gas projects in Queensland that may meet rising demand in north Asia for cleaner-burning fuels. Brisbane-based Pure’s independent directors and two key shareholders earlier this week accepted BG’s offer, taking its interest in the target to about 29 percent, while Arrow has 20.2 percent and Shell about 11.2 percent.

BG’s latest offer “requires everyone to come across the board” to succeed, said Andrew Williams, an oil and gas analyst at Credit Suisse Group in Melbourne. “It’s a ‘put up or shut up.’ You would only do it if you thought you had options” for other investments, he said.

Pure Energy dropped 2 Australian cents, or 0.3 percent, to A$8.13 on the Australian stock exchange, 12 cents below BG’s increased offer. Pure had been trading above all the offer prices since they were made. Arrow slipped 0.7 percent to A$2.67.

‘Crossover Point’

Brisbane-based Arrow said yesterday it was still considering “all options” on the takeover.

“At some point there is a crossover point for us between value we would get from accepting into the bid versus value that we’d get from acquiring the company,” Arrow Chief Executive Officer Nick Davies said yesterday. Neither Davies nor Shaun Scott, chief executive of Arrow’s Australian business, could be reached for comment today.

Shell yesterday reiterated that it was continuing to evaluate all offers for Pure. Pure today repeated in a separate statement that its independent directors unanimously recommend shareholders accept BG’s offer in the absence of a higher bid.

BG has no agreements with either Arrow or Shell for the sale of their shares in Pure, the Reading, England-based company said in an e-mail. Should BG not reach 90 percent acceptances by the end of the offer, due March 23, Pure shareholders that have accepted will receive A$8 a share, the earlier, unconditional bid price, it said.

Pure Triples

Pure has almost tripled in Sydney trading since Arrow made its first offer in December to gain reserves to supply an LNG plant planned in Gladstone by Liquefied Natural Gas Ltd. The bidding contest with BG underscores the allure of Australia’s coal-seam gas industry, which drew more than A$17 billion in investment last year from companies seeking to meet Asian demand for cleaner fuels.

The LNG Ltd. venture is one of five rival projects proposed for the central Queensland coast city. BG, Shell, Malaysia’s Petroliam Nasional Bhd. and ConocoPhillips are among companies planning to convert gas extracted from coal seams into LNG for export to Asia, the biggest market for the fuel.

LNG is gas chilled to liquid form for transportation by tanker to destinations not connected by pipeline.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net

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Babcock Power Seeks to Avoid Debt Covenant Default

By Angela Macdonald-Smith

Feb. 27 (Bloomberg) -- Babcock & Brown Power, the Australian electricity producer that is selling plants to reduce borrowings, said it’s seeking to avoid defaulting on its debt covenants after a “soft” start to the year cut forecast profit.

The company is most at risk of defaulting on its debt covenants during the next two quarters, Chief Financial Officer Peter Brook said today on a conference call about first-half earnings. The company believes the business is “still solvent,” even as a “cash hole” materializes over the next six months, he said.

Babcock Power yesterday cut its full-year earnings forecast by as much as 7.4 percent, citing lower-than- anticipated power prices in Queensland and reduced availability of a generator in South Australia. It is in talks with its banks about the conditions it needs to meet to maintain A$2.5 billion ($1.6 billion) of debt held at the BBPF unit.

“The board and the management are acutely aware of the debt and the cash flow pressures facing the business,” Chairman Len Gill said on the conference call. The timing of the one-off events that have reduced profit expectations is “not helpful,” he said.

Babcock Power today dropped 0.3 cent, or 5.8 percent, to 4.9 cents in Sydney trading on the Australian stock exchange.

Several short-listed parties are examining the accounts of plants set to be sold, Babcock Power said in a statement to the exchange. Some potential bidders are interested only in plants in eastern Australia, while some would only invest in those in the west, and the process may take until the fourth quarter to complete, it said.

The company has also received non-binding corporate offers, Gill said on the call. He declined to respond to questions on any approach by Bahrain-based Arcapita Bank SBC.

Babcock Power today reported an 80 percent drop in first- half net profit to A$17.8 million.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net

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Fuel Systems Targeted by Short Sellers as Chief Remains Upbeat

By Peter J. Brennan

Feb. 27 (Bloomberg) -- Seven months after oil prices tumbled by more than half from a record in July, Fuel Systems Solutions Inc. is counting on a rebound to as much as $90 a barrel to boost demand for the components that enable gasoline engines to burn low-emissions fuels.

Some investors aren’t persuaded that Fuel Systems’ shares will rise with the price of oil. Short interest has quintupled since November, a sign some stockholders expect the shares to fall. Short sellers say the shares may be over-valued, noting that the ratio of the stock price to per-share earnings is double that of other auto suppliers, said Graham Mattison, an analyst with Lazard Capital Markets Ltd. in New York.

“A lot of people are saying, ‘They are in the automotive business, no matter how you cut it,’” said Mattison, who has a “hold’ rating on the shares. “The outlook for automotive sales has become more bleak.”

Worldwide automobile production will decline 12 percent to 62.6 million this year, according to Haig Stoddard, analyst at IHS Global Insight in Troy, Michigan. His estimate has fallen from last July when he predicted 2009 production of 78.4 million. Ford Motor Co., the second-largest U.S.-based automaker, yesterday lowered its 2009 U.S. sales forecast by 1 million vehicles.

Fuel Systems, based in Santa Ana, California, was formed in 2006 by the merger of Impco Technologies and BRC S.r.L, a Cherasco, Italy- based firm.

The company or its trained distributors convert new or used vehicles to alternative fuels by adding components to the engine and a separate fuel tank for propane or natural gas. The conversion takes about two days and costs as much as $10,000 in the U.S.

‘250 Million Cars’

When asked about rising short interest, Fuel Systems’ Chief Executive Officer Mariano Costamagna said traders should know that the stock mirrors the price of oil, which is too low. “The correct price,” $70 to $90 a barrel, will be reached later this year and demand for Fuel Systems’ products will pick up, he said.

“There are 250 million cars in the U.S. running on petrol,” Costamagna said from his office in Santa Ana. “They are all potential clients.”

The company’s Web page declares that “escalating oil prices” will boost demand for components to reduce consumption. A barrel of oil reached $145.29 in July. The price for April delivery as of this week was $40.86.

Mattison is the only one of six analysts following Fuel Systems with a “hold” rating on the shares. The five others rate it a “buy.”

Analysts’ Estimates

Per-share profit may be little changed in 2009 while sales will increase 7.9 percent, the slowest growth since 2002, according to the average of six analysts’ estimates compiled by Bloomberg.

The stock last year more than doubled in value. Landi Renzo SpA of Italy climbed 45 percent. Costamagna said Landi is the company’s biggest rival. Mattison said new competitors are entering, such as Juniper Engines Inc., a joint venture between Westport Innovations Inc. and OMVL SpA, which in January introduced forklift engines fueled by liquefied petroleum gas.

Analysts haven’t altered their views of Fuel Systems in the past six months. John Quealy of Canaccord Adams Inc. raised his rating to “buy” from “hold” in August, before the stock fell by half, mirroring the drop in oil prices and car sales.

Other analysts, including Ron Oster of Broadpoint American Technology, also are firm in their support.

Fuel Systems deserves a higher valuation because it has good products in an environmentally friendly industry where governments are promoting growth, including rebates for those who switch to engines running on cleaner fuels, said Oster, who is based in Greenwich, Connecticut. He has a $50 target price on the shares.

“You cannot simply compare it to other auto suppliers,” Oster said. “Because there is a clean-tech component, there is a higher growth component.”

Short Sellers

Investors may see a surge in the share price if Fuel Systems reports earnings on March 5 that top analysts’ expectations, Oster said. Fuel Systems beat estimates in each of the past four quarters and the shares climbed an average of 30 percent in the next trading session, he said.

About 5.82 million shares were sold short as of Feb. 13, according to Bloomberg data, five times as many as on Oct. 31, and eight times the average daily trading volume of 729,000 in the past six months.

Short sellers borrow stock and sell it in anticipation of a drop in value. They then buy back the shares at the lower price and pocket the difference.

The shares fell $1.65, or 7.9 percent, to $19.13 yesterday in Nasdaq Stock Market composite trading. They have dropped 42 percent this year.

Costamagna and his brother Pier Costamagna together own 21 percent of Fuel Systems as of Aug. 19, according to Bloomberg data.

Fuel Systems’ Impco unit sells primarily into the industrial market with customers like forklift maker Nacco Industries Inc. while its BRC business converts vehicles for makers such as Toyota Motor Corp. and General Motors Corp.

Cheaper Than Gasoline

Tougher emission standards and differences in state requirements have pushed the conversion price to as much as $10,000 a vehicle in the U.S., about three times the rate for a vehicle in Europe, analyst Oster said.

Natural-gas can be as much as 50 percent cheaper than gasoline and emit up to 29 percent less carbon dioxide, said Richard Kolodziej, president of NGVAmerica, a lobbying group.

Fuel Systems has several factors in its favor, including tax breaks for consumers and businesses, a new unit for North America, a large distribution network, long-standing relationships with automakers and a product that permits cars to run on either natural gas or regular gas, Oster said.

Short trades began rising in November. John Lansing, a technical analyst who co-founded the Web site Trending123, recommended shorting the shares to the low $20s because it was tied to falling prices of commodities. He sold at $23.

“That was close enough” to the bottom, said Dallas-based Lansing, who said he made about a 30 percent profit. He predicted the stock will rebound to the high $20s before “it ultimately goes to $18.”

To contact the reporter on this story: Peter J. Brennan in Los Angeles at pbrennan3@bloomberg.net.

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Australian Dollar Heading for Best Month Since 1995 Versus Yen

By Candice Zachariahs

Feb. 27 (Bloomberg) -- The Australian and New Zealand dollars headed for their biggest monthly advance against the yen since at least 2000 as concerns intensify that the recession in the world’s second-largest economy is deepening.

Australia’s currency headed for a monthly gain against the U.S. dollar as reports this week showed bank lending and capital spending in Australia were stronger than expected, bolstering speculation the central bank will slow the pace of interest-rate cuts. Japan’s manufacturers cut production by a record 10 percent in January and household spending plunged, adding to evidence that the economy is in its worst recession in 60 years.

“What we’re seeing in Japan’s numbers is a massive hit from the dislocation in global trade,” said Tony Morriss, a senior markets strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “We’re looking at a new wave of investment heading out of Japan, perhaps seeking higher yield elsewhere.”

Australia’s currency declined to 63.09 yen at 4:06 p.m. in Sydney, from 63.46 late yesterday in Asia. It has gained 10 percent in February, the most since August 1995. The local currency fell to 64.57 U.S. cents from 64.82 cents yesterday, paring its advance since Jan. 30 to 1.3 percent.

New Zealand’s dollar slid to 49.48 yen from 49.92 yesterday, reducing this month’s advance to 7.9 percent, the biggest jump since December 2000. The currency was at 50.61 U.S. cents from 51 cents yesterday and 50.92 cents at the end of last month.

Australian bank lending rose 0.6 percent in January, twice the median gain expected by 18 economists surveyed by Bloomberg News, the Reserve Bank of Australia said in Sydney today.

Interest Rates

Benchmark interest rates are 3.25 percent in Australia and 3.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S. That is attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

Australia’s dollar may advance toward 66.50 U.S. cents if the Reserve Bank of Australia leaves its benchmark rate unchanged when it meets March 3, Morriss said. The median estimate of 17 economists polled by Bloomberg News is for a reduction to 2.75 percent.

The currency has fallen 6.7 percent this year and New Zealand’s dollar has declined 12 percent against the greenback as declining interest rates and concern over a worsening global outlook prompted investors to sell the nations’ assets.

“The exchange rate is working for us,” Reserve Bank of New Zealand governor Alan Bollard said in a speech to a conference in Auckland today. “It is helping cushion the shocks, it’s helping make us more competitive.”

New Zealand

Bollard will cut borrowing costs to 2.75 percent on March 12, according to the median estimate of 11 economists surveyed by Bloomberg News, to boost the economy out of its fifth quarter of negative growth.

New Zealand’s home-building approvals fell to a record low in January as a prolonged recession and the prospect of job losses kept consumers out of the property market.

Approvals fell 13 percent from December, when they declined 7.1 percent, Statistics New Zealand said in Wellington today, citing seasonally adjusted figures. There were 949 approvals, the lowest since records began in 1982, the agency said.

“It looks to be a deepening recession in New Zealand, which argues for further central bank rate cuts,” said Su-Lin Ong, a senior economist at RBC Capital Markets Ltd. in Sydney. The RBNZ governor is “continuing to give the green light to selling the currency by emphasizing that it plays a major role in the economy’s adjustment.”

Australian government bonds fell. The yield on 10-year notes advanced 14 basis points, or 0.14 percentage point, to 4.39 percent, the highest in three weeks, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 slipped 1.21, or A$12.10 per A$1,000 face amount, to 106.92. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, fell to 3.23 percent from 3.27 yesterday.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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Asian Currencies: Won Near 11-Year Low, Rupee Drops to Record

By Bob Chen

Feb. 27 (Bloomberg) -- Asian currencies fell this month, with South Korea’s won slumping toward an 11-year low and the Indian rupee dropping to a record, on concern sliding exports and shrinking economies will deter foreign investment.

The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s 10 most-active currencies excluding the yen, touched the lowest level in three years as overseas investors cut holdings of emerging-market assets. Government reports this week showed Taiwan’s unemployment rate rose to a seven-year high, Hong Kong’s exports plunged by the most since 1958, and Singapore’s economy had the biggest quarterly contraction in at least 33 years.

“The degree of downturn in Asian economies has been surprisingly substantial,” said Tomo Kinoshita, an economist at Nomura Holdings Inc. in Hong Kong. “That has probably upset the investors of equity and fixed income, which certainly helped to depreciate the currencies.”

The won dropped 0.3 percent today to 1,521.25 per dollar as of 1:41 p.m. local time, for a monthly loss of 9 percent, the worst performance in the region, according to Seoul Money Brokerage Services Ltd. It reached 1,524.50, near November’s 11- year low of 1,525. India’s rupee declined as much as 0.6 percent to 50.77, and was down 3.4 percent in February.

Asian governments are increasing spending and central banks have slashed interest rates to help revive economies suffering from declining demand for exports as the global recession deepens.

‘Long Dollar’

Eight of the 10 most-active Asian currencies dropped against the dollar this month as investors favored safer bets than emerging markets. The MSCI Asia Pacific Index of regional shares fell 7.2 percent in February, taking the loss this year to 16 percent. The gauge declined 43 percent in 2008.

Government reports today will show Malaysia’s and India’s economies expanded at the slowest pace in at least four years last quarter, according to economists in Bloomberg News surveys.

“Everyone is long the dollar,” said Paul Joseph Garcia, who helps oversee $1.19 billion as chief investment officer at the Manila unit of ING Investment Management Ltd. “If you look at Asian exports, it looks like they’re falling by half.” Long positions are bets that a currency will rise.

Indonesia’s rupiah fell 0.7 percent today to 12,055 per dollar, headed for a monthly drop of 5 percent, according to data compiled by Bloomberg. Taiwan’s dollar dropped as low as NT$34.945, the weakest since April 2003, according to Taipei Forex Inc.

Korean Measures

South Korea’s won plunged more than 17 percent this year on concern sliding exports will curb the supply of dollars and hinder the ability of local banks and companies to repay overseas debt.

The government will exempt overseas investors from taxes on interest earned on their holdings of domestic bonds to spur foreign investment and boost inflows of dollars, the Finance Ministry said yesterday. The nation posted its first current- account deficit in four months in January.

“They are trying to cover all bases, which is the prudent thing to do, but that does not alleviate market concerns that there may be foreign currency liquidity issues over the next few months,” said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong. “Given the impact that this has on the won in 2008, you’d be foolish as an investor to ignore it.”

Capital outflows from South Korea are unlikely this year, Vice Finance Minister Hur Kyung Wook said at a briefing yesterday. The won will see continued volatility for now, the Financial Services Commission said.

India Outlook Cut

The country is headed for its first recession since the 1997-1998 Asian financial crisis. The Bank of Korea reduced its benchmark interest rate to a record low of 2 percent this month and Governor Lee Seong Tae said there’s room for another cut.

India’s rupee headed for a second weekly loss and offshore forward contracts showed traders increased bets for the currency to extend losses after Standard & Poor’s cut the nation’s credit rating outlook to negative.

India’s spending plans to help shield the economy from the global recession are “not sustainable,” S&P said on Feb. 24. Exports may fall short of the government’s target of $200 billion in the year to March 31, Trade Minister Kamal Nath said yesterday.

“The rupee is now under increased pressure following the rating outlook cut,” said Krishnamurthy Harihar, treasurer at Development Credit Bank Ltd. in Mumbai. “There’s a decent possibility of an actual rating downgrade in the near future and that’ll fuel capital outflows.”

‘Risk Aversion’

Indonesia’s rupiah is poised for a seventh weekly decline, the longest losing streak since November 2007. Southeast Asia’s biggest economy sold $3 billion of bonds in the largest fundraising by a developing nation this year to finance the budget deficit.

“This is purely risk aversion,” said Enrico Tanuwidjaja, an economist at Oversea-Chinese Banking Corp. in Singapore. “There is also month-end corporate dollar demand that is pushing the rupiah down.”

Taiwan’s dollar dropped 3.8 percent this month, the third- worst performance among the 10 most-active Asian currencies outside Japan.

The statistics bureau said yesterday the jobless rate climbed to 5.33 percent, more than economists forecast in a Bloomberg News survey. Export orders, an indicator of shipments in the next one to three months, fell by a record last month and overseas sales also posted the biggest-ever drop.

China’s economy will rebound around April, with the other Asian countries following suit in the second half of the year, Nomura’s Kinoshita said.

China is confident and has the conditions to reach the government’s target of 8 percent economic growth in 2009, said Liu Tienan, Vice Chairman of the National Development & Reform Commission, at a briefing in Beijing today.

Elsewhere, Malaysia’s ringgit traded at 3.6925 per dollar, headed for a monthly decline of 2.3 percent. Thailand’s baht fell to 36.08, a two-year low. The Philippine peso traded at 48.695, poised for a monthly loss of 2.7 percent. China’s yuan was little changed this month at 6.8407.

To contact the reporters on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net

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Goodwin’s Pension Stance Is ‘Unacceptable,’ U.K.’s Myners Says

By Thomas Biesheuvel

Feb. 27 (Bloomberg) -- Former Royal Bank of Scotland Group Plc Chief Executive Officer Fred Goodwin’s decision not to voluntarily reduce his pension is “unfortunate and unacceptable,” Treasury Minister Paul Myners wrote in a letter to Goodwin today.

Before last week the government was unaware that Goodwin’s pension may have been a discretionary choice by the previous board of RBS, Myners wrote in the letter, a copy of which was e- mailed by the government to Bloomberg News late yesterday.

RBS, which has sought legal advice on Goodwin’s 650,000- pound annual pension, yesterday posted a 24.1 billion-pound net loss, the biggest ever by a U.K. company. It may sell as much as 19 billion pounds of preference shares to the government and plans to put 325 billion pounds of investments into an insurance program backed by British taxpayers.

Goodwin won’t voluntarily reduce his pension entitlement the British Broadcasting Corp reported, citing a letter Goodwin wrote to Myners. Goodwin’s offer to waive his 12-month notice period before he left the bank was indicated by Myners to be an “appropriate and sufficient recognition of the circumstances,” Goodwin wrote.

While the topic of Goodwin’s pension entitlement was raised with Myners by the bank before Goodwin stood down in November, it was indicated to Goodwin that no further “gestures” were required, Goodwin wrote in the letter.

Myners said that while he welcomed Goodwin’s decision to waive his 12-month notice period and certain share awards before he left the bank, that did not amount to approval of his pension arrangements.

‘Cannot Justify’

“I hope that on reflection you will now share my clear view that the losses reported today by the bank which you ran until October cannot justify such a huge award,” Myners wrote in the letter to Goodwin.

Prime Minister Gordon Brown has “demanded action” on the issue, saying pension payments on such a scale could not be justified when the company was losing so much money and cutting thousands of jobs, the BBC reported.

New RBS chairman Philip Hampton, has said he had asked Goodwin two weeks ago to voluntarily reduce the pension but had yet to receive an answer, the BBC also said.

RBS spokesman Neil Moorhouse declined to comment about Goodwin’s pension arrangements or whether Hampton has contacted Goodwin on the matter.

To contact the reporter on this story: Thomas Biesheuvel in London tbiesheuvel@bloomberg.net.

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India Rupee Falls to Record on Junk Rating Risk, Economic Slump

By Anil Varma

Feb. 27 (Bloomberg) -- India’s rupee fell to a record low on concern overseas investors will step up sales of local assets after Standard & Poor’s said it may cut the nation’s credit rating to junk and economic growth slumped to a five-year low.

The currency has tumbled 21 percent versus the dollar in the past year, the third-biggest loss among Asia’s 10 most-used currencies. S&P said Feb. 24 the government’s spending plans to shield the country from a global recession were “not sustainable.” The economy expanded 5.3 percent in the fourth quarter, the slowest since 2003, the government reported today.

“The rupee is now under increased pressure following the rating-outlook cut by S&P,” said Krishnamurthy Harihar, treasurer at Development Credit Bank Ltd. in Mumbai. “There’s a decent possibility of an actual rating downgrade in the near future and that’ll fuel more capital outflows.”

The rupee declined as much as 0.6 percent to 50.77 per dollar, an all-time low, before trading at 50.6850 as of 11:10 a.m. in Mumbai, according to data compiled by Bloomberg. It may slide as low as 51 in the coming days, Harihar said.

Offshore contracts indicate traders bet the rupee will trade at 50.93 to the dollar in a month, compared with expectations for a rate of 50.67 yesterday. Forwards are agreements in which assets are bought and sold at current prices for future delivery. Non-deliverable contracts are settled in dollars rather than the local currency.

‘Loose Fiscal Policy’

“Continued loose fiscal policy or policy setbacks on monetary, financial, and economic fronts that lower India’s medium-term growth prospects would result in a downgrade,” S&P said in a statement. The company currently rates India’s long- term credit rating at BBB-, the lowest investment grade. Some fund managers are restricted from investing in non-investment grade, or junk, assets.

A deepening global economic slump is eroding the ability of emerging-market economies to raise funds, causing current account and budget deficits to balloon as exports and economies shrink. S&P cut the debt ratings of Latvia and Ukraine this week and said it has negative outlooks for Romania and Bulgaria.

India said this month its budget deficit will more than double to 6 percent of gross domestic product, as it borrows record amounts to finance stimulus measures to revive Asia’s third-largest economy. Government borrowings are set to rise to 3.06 trillion rupees ($60.4 billion) in the year ending March 31, from 1.56 trillion in the previous year.

Stock Sales, Exports

Funds based abroad sold $1.5 billion more Indian equities than they bought this year, adding to 2008’s record $13.3 billion in net sales, according to data released by the Securities and Exchange Board of India. The Bombay Stock Exchange’s Sensitive Index has dropped 9.1 percent this year, following a record 52 percent slide in 2008.

The rupee also fell on concern declining exports will widen the nation’s current-account deficit, increasing demand for dollars to fund the shortfall. A rally in crude oil also added to speculation the current account shortfall will deepen. India imports almost three-quarters of the oil it uses.

Overseas sales may fall short of the government’s target of $200 billion in the year to March 31, Trade Minister Kamal Nath said yesterday. Exports shrank an average 7.7 percent a month last quarter and imports grew 8.5 percent

“The combination of slowing exports and rising oil prices can add to the rupee’s weakness,” Development Credit’s Harihar said. “The current account will come under pressure.”

Current Account

The deficit in India’s current account, a broad measure of trade flows, remittances and investment income, increased to $12.5 billion in the quarter to Sept. 30, from $9.8 billion in the previous three months, according to the central bank.

Crude oil has gained more than 14 percent this week on the New York Mercantile Exchange, heading for the biggest advance in five weeks.

The rupee’s losses were curbed by speculation the central bank will sell dollars from its reserves to limit currency volatility. The Reserve Bank of India has been intervening in the currency market to smooth rupee movements, causing a decline in the nation’s foreign-exchange reserves, acting Finance Minister Pranab Mukherjee told lawmakers in New Delhi yesterday.

Foreign-exchange reserves dropped to $249.7 billion this month, from a record $316.2 billion reached in May 2008, central bank data show. Central banks intervene by arranging sales or purchases of foreign currency to influence exchange rates.

Implied volatility on one-month dollar-rupee options climbed to 14.5 percent, the most since Feb. 18, Bloomberg data show. Traders quote implied volatility, a gauge of expected swings in exchange rates, as part of option prices.

To contact the reporters on this story: Anil Varma in Mumbai at avarma3@bloomberg.net.

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Yen Advances, Paring Worst Month Since 1995, as Exporters Buy

By Theresa Barraclough and Ron Harui

Feb. 27 (Bloomberg) -- The yen gained, paring the worst monthly decline against the dollar since 1995 and the biggest drop versus the euro in eight years, on speculation exporters were taking advantage of its weakness to bring profits home.

Japan’s currency also strengthened for the first time in five days versus the greenback as a technical indicator showed its five-week slide was excessive. The euro fell, heading for a second month of losses versus the dollar, after the Financial Times said Iceland is developing a plan to restructure its bonds, suggesting the region’s financial turmoil is worsening.

“The yen has been falling throughout the entire week so there’s sentiment that it’s oversold,” said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital Inc., the world’s third-largest foreign-exchange trader. “We also may see Japanese purchases of the yen” as today is the last trading day of the month, he said.

The yen climbed 0.7 percent, its biggest gain in a week, to 97.80 against the dollar as of 7:07 a.m. in London from 98.52 yen late in New York yesterday. It touched 98.71 yesterday, the weakest since Nov. 10. The Japanese currency traded at 124.34 per euro from 125.52 yesterday, when it reached 126.08, the lowest since Jan. 8.

The euro traded at $1.2713 from $1.2744, and was at 89.06 British pence from 89.04 pence. The dollar climbed to $1.4275 against the pound, from $1.4317. Against the yen, Australia’s dollar declined 1.2 percent to 63.03 and New Zealand’s dollar dropped 1.2 percent to 49.48.

Krona, Zloty

Sweden’s krona fell to a record low of 11.4710 against the euro before trading at 11.4322. The krona headed for a 6.6 percent slump this month. Poland’s zloty dropped 0.3 percent to 4.7252 per euro and is poised for a 5.6 percent monthly loss.

The Dollar Index was set for a second monthly gain on optimism that U.S. President Barack Obama’s efforts to shore up the banking system will stem the credit crisis. Obama yesterday proposed a budget for as much as $750 billion of fresh aid for the financial industry.

“The Obama administration is taking policy steps more proactively than other governments,” said Masashi Kurabe, head of currency sales and trading in Hong Kong at Bank of Tokyo- Mitsubishi UFJ Ltd., a unit of Japan’s largest publicly traded bank by assets. “Sentiment for the dollar is strong.”

The dollar may rise to $1.2650 per euro today, he said.

The ICE’s Dollar Index, which tracks the U.S. currency versus the euro, yen, pound, Canadian dollar, krona and Swiss franc, traded at 87.933 from 87.727 yesterday. It touched 88.254 on Feb. 18, the strongest level since a 2 1/2-year high reached on Nov. 21.

‘Yen Strength’

A technical chart traders use to predict price movements signaled the yen’s 4.6 percent decline this week versus the greenback was overdone. The dollar’s 14-day relative strength index versus the yen, a comparison of magnitudes of gains and losses, was 72.8 today, above the 70 level that signals the currency may have risen too quickly and is poised to decline.

“We’re moving into a world of yen strength, reflecting Japan’s strong external position and current-account surplus, and a very large net foreign-asset position,” said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG. “We’re not at a turning point for the yen, medium-term.”

The yen has dropped from January’s 13-year high against the dollar as government reports showed Japan is headed for its worst postwar recession. Industrial output declined 10 percent from a month earlier, the most on record, the Trade Ministry said today in Tokyo. Household spending fell 5.9 percent from a year earlier, the biggest drop in more than two years.

Financial Crisis

Europe’s single currency fell in the past month on concern the financial crisis in Eastern Europe will deepen. Standard & Poor’s cut the credit ratings of Ukraine and Latvia this week, damping demand for the euro.

The 16-nation currency also fell after the Financial Times reported today that Iceland is developing a plan to ask local owners of foreign assets to exchange their holdings for $3.6 billion of the country’s bonds owned by overseas investors. The newspaper, citing Finance Minister Steingrimur Sigfusson, said the move is aimed to ease concern capital outflow will quicken.

“We are bearish on the euro because of the turmoil in eastern Europe and the inflexibility of policy making,” said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan currency trader.

The European currency will weaken to $1.15 and 100 yen by the end of June, Yamamoto said.

To contact the reporters on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net; Ron Harui in Tokyo at rharui@bloomberg.net.

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Darling Forces RBS to Give Up U.K. Tax Relief on Record Losses

By Mark Deen

Feb. 27 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling forced Royal Bank of Scotland Group Plc to give up the right to claim its current losses against future taxes in the U.K., a potential boost to the Treasury’s finances.

In exchange for guaranteeing 325 billion pounds ($462 billion) of RBS assets, the Treasury required the bank to forgo unspecified allowances that normally could be used to reduce its payments and also the right to count losses against taxes owed.

The decision will help Prime Minister Gordon Brown confront the biggest budget deficits since modern records began in 1970 as the recession dries up revenue to the Treasury. RBS paid 16 billion pounds of corporate tax from 1998 to 2007, about 80 percent of the cost of its government-funded recapitalization.

“This is a sign of things to come,” said Peter Spencer, a former Treasury official now advising Ernst & Young. “The government has got to spend now to keep the wolf from the door, but we’re all trying to figure out when the debt is going to have be paid off.”

Lloyds Banking Group Plc also is talking to the Treasury about joining the asset protection plan tapped by RBS yesterday. An announcement detailing its participation may come as early as today. Lloyds said the terms it negotiates with ministers may not be the same as the RBS program.

Record Loss

Yesterday, RBS reported a 24.1 billion-pound loss for 2008, the biggest in U.K. corporate history and surpassing the 22 billion pounds Vodafone Group Plc lost in 2006. In ordinary times, that loss could be used to reduce taxes in future years.

RBS “agreed for a number of years not to claim certain U.K. tax losses and allowances, meaning that when they do return to profitability, they will not be able to benefit from the losses accrued in the intervening period,” Darling said yesterday.

“That will soak up cash from the bank and increase the Treasury’s tax yield,” said George Bull, a tax accountant at Baker Tilly in London. “It will also reduce the amounts available for lending or shareholder dividends.”

Britain’s five biggest banks -- RBS, Lloyds, HSBC Holdings Plc, Barclays Plc and Standard Chartered Plc -- set aside about 5.3 billion pounds to pay U.K. corporation tax in 2007, according to Bloomberg calculations based on their annual reports. That’s about 10th of the 46 billion pounds collected.

Wider Deficits

While Darling is ladling out money now, he’s also working to shore up the public finances in coming years when he assumes the economy will rebound. In the first 10 months of the fiscal year, the deficit widened to 67.2 billion pounds, the most since records began in 1993, from 23.1 billion pounds a year earlier.

“There’s no easy way out for the government finances,” said David Page, an economist at Investec Securities. “Weakness in financial sector profits over the next year or so means the outlook for corporation tax receipts is bleak.”

Voters are increasingly upset with the government for allowing banks to rack up bad debts and want Brown to rein both risky behavior and the bonuses of the executives responsible. Brown’s Labour Party trailed the Conservative opposition by 20 points in an Ipsos-Mori Ltd. survey earlier this month, the most since before the first bailout in October.

“There’s a feeling of ‘how much longer can this go one for?’” said Andrew Hawkins, a pollster at ComRes Ltd. in London. “There’s real public anger.”

Darling’s budget plan calls for a fiscal stimulus of about 20 billion pounds including spending increases and tax cuts for the next two years. Following that, he expects to increases revenue for the following three years.

The Institute for Fiscal Studies, a public finances consultant that includes the Treasury and Bank of England among its clients, says the deficit is manageable so long as the government takes credible steps to close it.

“Better to do too much that may not be necessary than be seen to do nothing when further effort is required,” said Gemma Tetlow, an IFS economist. Tightening could “subsequently be reversed if it isn’t needed.”

To contact the reporters on this story: Mark Deen in London at markdeen@bloomberg.net

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Japan Jan. Aluminum Shipments Tumble Most in 28 Years

By Aya Takada

Feb. 27 (Bloomberg) -- Japan’s shipments of aluminum rolled products plunged by the most in 28 years as carmakers and electronics equipment producers slashed purchases.

Shipments to the domestic and exports markets fell 31 percent to 122,193 metric tons in January from 176,301 tons a year earlier, the Japan Aluminium Association said in a statement today. It was the fourth straight month of decrease and the largest decline since November 1980.

Japan headed for its worst postwar recession in January as manufacturers cut production by an unprecedented 10 percent and consumers slashed spending. The nation’s exports plunged a record 45.7 percent last month as demand also slumped in the U.S. and the European Union.

“Demand from almost all the industrial sectors declined in January,” Koji Iida, an association spokesman, said today in Tokyo. “The situation is still worsening this month.”

Japan’s month-on-month decline in factory output in January exceeded December’s record decline of 9.8 percent, the Trade Ministry said today in Tokyo. Household spending fell 5.9 percent from a year earlier, the biggest drop in more than two years.

Toyota Motor Corp., Japan’s biggest automaker, slashed global output last month by the most in more than two decades as the recession and a credit crunch decimated demand for new cars.

Toyota’s output fell 43 percent to 413,285 vehicles in January. Honda Motor Co.’s production dropped 33 percent to 226,551 vehicles and Nissan Motor Co.’s slid 54 percent to 145,286 units, the companies said separately Feb. 25.

The members of Japan Aluminium Association include Furukawa- Sky Aluminum Corp., Kobe Steel Ltd. and Nippon Light Metal Co. Details of output, shipments and inventories are as follow:

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

Jan ‘09 Dec ‘08 Jan/Dec Jan Y/Y

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

(%) (%)

OUTPUT 117,261 144,175 -18.7 -32.1

Flat-rolled 65,262 83,747 -22.1 -34.1

Extruded 51,999 60,428 -13.9 -29.3

SHIPMENTS 122,193 142,976 -14.5 -30.7

Flat-rolled 70,223 82,571 -15.0 -32.1

Extruded 51,970 60,405 -14.0 -28.7

INVENTORY 86,883 92,335 -5.9 +7.9

Flat-rolled 75,788 80,744 -6.1 +8.7

Extruded 11,095 11,591 -4.3 +2.6

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

To contact the reporter on this story: Aya Takada in Tokyo at atakada2@bloomberg.net

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