BIS Says Longer-Term Bond Yields May Rise on Budget Concern

By Klaus Wille

Sept. 14 (Bloomberg) -- Longer-term bond yields are likely to rise amid investors’ concern about budget deficits built up by governments to fight the global recession, the Bank for International Settlements said.

“Fiscal sustainability concerns are likely to affect forward yields that span distant horizons, which are less influenced by near-term expectations about inflation, economic growth and monetary policy,” the Basel, Switzerland-based BIS said in a quarterly report yesterday. The BIS expects budget concern to put “upward pressure on “real forward rates.”

Governments from the Group of 20 nations have pumped more than $2 trillion into their economies, swelling their budget deficits. The U.S. fiscal shortfall is already around 11 percent of gross domestic product, the most since World War II, and the U.K. deficit will be around 12.4 percent this year.

The euro region’s five-year, five-year forward rate has risen to 2.67 percent from 2.51 percent at the end of March. Five-year, five-year forwards are a measure of investors’ expectations for inflation over a five-year period starting five years from now.

At the same time, the BIS said economists and investors expect the global economic slump to keep a lid on inflation.

“Long-term” price pressures “appear contained for now, despite surging fiscal deficits and record-low monetary policy rates,” the BIS said in its report for the period from the end of May to September. “This may reflect the belief that the current high level of economic slack will persist for some time.”

To contact the reporter on this story: Klaus Wille in Zurich at kwille@bloomberg.net

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U.S. Economy May See Its Slowest Recovery Since 1945

By Rich Miller

Sept. 14 (Bloomberg) -- The U.S. recovery may be the slowest since World War II to regain all the ground lost during the recession, even if economists’ more optimistic forecasts for expansion turn out to be right.

The slump this time was so deep, said JPMorgan Chase & Co. chief economist Bruce Kasman, that the 3.5 percent average quarterly growth rate he sees in the next year won’t be enough to bring gross domestic product back to its $13.42 trillion pre- crisis peak. That’s in contrast with the last 10 recoveries, when GDP returned to its previous levels within 12 months.

The result: A year after the Lehman Brothers Holdings Inc. bankruptcy helped drive GDP down to an annualized $12.89 trillion in the second quarter, there’s still “plenty of malaise,” Kasman said. Unemployment may remain close to the current 26-year high of 9.7 percent through 2010, upsetting voters ahead of mid-term Congressional elections and forcing officials to keep interest rates near zero and the budget deficit around this year’s record $1.6 trillion.

“This will be the most disappointing recovery,” said Kasman, whose forecast compares with the median estimate of 2.5 percent growth in a Bloomberg News survey of economists.

The U.S. might not recover the 6.9 million jobs and the $13.9 trillion in wealth lost during the recession until about the middle of the decade, said Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania. The unemployment rate may never get back down to the 4.4 percent low of 2007, he said.

Cyclical Revival

Stock prices may take three or four years to reach their previous highs as the cyclical revival of the economy gradually boosts corporate profits, said Allen Sinai, chief economist at consulting group Decision Economics in New York.

“It will be a bull market, but not a roaring bull market,” Sinai said. He sees the Standard & Poor’s 500 stock index rising to 1,100 by the end of 2009 from its close of 1,042.73 on Sept. 11. The index hit a record 1,565.15 on Oct, 9, 2007, and then fell to a 12-year low of 676.53 on March 9, 2009.

Companies, particularly retailers such as Macy’s Inc., may have to adjust as consumers buy less. Household spending as a share of GDP might fall to its long-run historical average of 65 percent from 70 percent in the past decade as people opt to save more, according to economists Peter Berezin and Alex Kelston, of Goldman Sachs Group Inc.

Biggest Drop

The restrained performance that is forecast for the economy reflects both the depth and the origins of the recession, which began in December 2007. The 3.9 percent decline in gross domestic product was the most since World War II.

While Nippon Yusen K.K., Japan’s largest shipping line, has been able to raise rates on container services to the U.S., it continues to lose money on the business. Mikitoshi Kai, head of investor relations for the Tokyo-based company, said in an interview that “we need to increase rates by a lot more to make a profit.”

The decline has been a “balance-sheet recession,” says Richard Koo, chief economist at Tokyo-based Nomura Research Institute. Those take time to recover from, as once highly leveraged banks and consumers gradually reduce their debt, he said.

Fed Outlook

Policy makers may have to keep interest rates low and the federal budget deficit high to push the economy forward as financial institutions and households adjust. Federal Reserve Chairman Ben S. Bernanke and his fellow central-bank colleagues might hold their target for the federal funds rate between zero and 0.25 percent through 2010, said Kasman at JPMorgan in New York, the second-largest U.S. bank. That’s the rate at which commercial banks lend each other money overnight.

“The Fed may need to maintain fairly low interest rates over a period of many years,” Berezin and Kelston, of New York- based Goldman, the fifth-biggest U.S. bank, wrote in a Sept. 9 report.

On the fiscal front, the deficit will total $1.29 trillion in the year starting Oct. 1, boosted by a $787 billion stimulus package and aid to banks, according to Maury Harris, chief economist in New York at UBS Securities, a unit of Zurich-based investment bank UBS AG.

“I suspect the deficit will continue to balloon for years,” said Kenneth Rogoff, a former chief economist at the International Monetary Fund who is now a professor at Harvard University in Cambridge, Massachusetts.

‘Wild Card’

The “wild card” is the political impact the economy’s chronic difficulties will have on mid-term Congressional elections in November 2010 and beyond, Kasman said.

Democratic lawmakers in the House of Representatives are particularly vulnerable if voters blame President Barack Obama for a sour economy, said Nathan Gonzales, political editor for the Rothenberg Political Report in Washington.

Since 1945, the party that controls the White House has lost an average of 16 House seats in a president’s first midterm election, according to the Cook Political Report. Obama’s Democratic Party currently has 256 seats in the chamber, compared with 178 for the Republicans.

In the past, deep recessions have often been followed by rapid recoveries. That’s what happened in 1982-83 as the economy surpassed its previous peak in about six months, thanks to a 7.2 percent surge in growth. Behind the turnaround: aggressive monetary easing by the Fed, which brought short-term interest rates down to 8.5 percent from 15 percent in 1982.

No ‘Gas’

“We thought that if we really stepped on the gas, the economy would take off, and it did,” said Lyle Gramley, a senior economic adviser for New York-based Soleil Securities who was a member of the Fed’s board at the time. That option isn’t available to the central bank now as the overnight interbank rate is at zero.

The Fed has also been hampered by a credit crunch that has restricted the flow of money from lenders to borrowers, Gramley said. Banks, faced with mounting credit losses, have tightened terms and standards on loans to businesses and households since the middle of 2007, according to the Fed’s tri-monthly survey of lending officers.

That’s akin to the situation in 1991-92, when tight credit in the wake of the savings-and-loan crisis restrained the recovery, according to Gramley. It took about nine months for the economy to return to pre-recession production levels as growth clocked in at an average 2 percent.

Borrowing Falls

Household borrowing fell by a record $21.6 billion in July to $2.5 trillion, the Fed reported on Sept. 9. The drop was the sixth straight monthly decline, the longest since the 1991 credit crunch.

Behind the fall: Banks are becoming stingier in handing out credit while consumers are growing more wary of taking on more debt. The savings rate rose to a 14-year high of 6 percent in May before falling to 4.2 percent in July, government data show. It was 1.3 percent at the start of 2008.

Retailers are taking notice of the increased consumer thriftiness, including Cincinnati-based Macy’s. Chairman and Chief Executive Officer Terry Lundgren told Bloomberg Television on Sept. 8 that the second-largest U.S. department-store company has reduced inventories “fairly significantly.”

Home builders may have to adjust, too. Sales of new houses jumped 9.6 percent in July, the most since February 2005, to a 433,000 annual pace. That was still less than half the 923,000 average since the start of 2000.

The increase in sales has helped boost the price of copper. Copper for delivery in three months closed Sept. 11 at $6,250 a metric ton on the London Metal Exchange. That compares with $3,231 on Jan. 2 and a high of $8,730 in April of last year.

“There were huge excesses built up during the expansion,” Sinai said. “It may take the economy a few years to get back to its previous peak.”

To contact the reporter on this story: Rich Miller in Washington rmiller28@bloomberg.net

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China Probes ‘Unfair Trade’ in U.S. Chicken and Auto Products

By Bloomberg News

Sept. 14 (Bloomberg) -- China announced dumping and subsidy probes of chicken and auto products from the U.S., two days after President Barack Obama imposed tariffs on tires from the Asian nation.

Chinese industries complain that they’re being hurt by “unfair trade practices,” the nation’s Ministry of Commerce said on its Web site yesterday. The dumping investigation relates to poultry alone, a spokesman said in Beijing today. The ministry didn’t specify the value of imports of the products.

Rising protectionism may hamper world trade and undermine the global economy’s recovery from recession, the European Central Bank said last week. The U.S. placed tariffs starting at 35 percent on $1.8 billion of tire imports from China, backing a United Steelworkers union complaint against the second-largest U.S. trading partner.

“While there’s friction, I suspect that the two nations will keep any disputes under control,” said David Cohen, an economist at Action Economics in Singapore. “They understand that they’re increasingly dependent as trading partners.”

Dumping is selling goods for less than the cost of producing them.

The state-run China Daily newspaper said in a front-page article today that the probe was “not revenge” for the decision on tires. The commerce ministry spokesman, who wouldn’t be identified by name, said the government was assessing whether the subsidy and dumping complaints had merit.

‘Strategic Relationship’

Rubber futures in Shanghai tumbled by the daily trading limit today because of the tire tariffs. The January-delivery contract dropped 5 percent from the previous settlement to 17,710 yuan a metric ton.

Wang Qing, chief Asia economist for Morgan Stanley in Hong Kong, said today that he doubted that the tire tariffs would trigger a trade war.

The “macroeconomic impact is not enough to warrant an escalation of such a trade dispute to such levels that would threaten the strategic relationship between the two countries,” Wang said.

The Chinese commerce ministry said Sept. 12 that it strongly opposes the U.S. decision on tires and may refer the case to the World Trade Organization.

A “sluggish” global recovery and rising unemployment may tempt governments to restrict trade, triggering a retaliatory spiral of measures, the Frankfurt-based ECB said in its monthly bulletin. Trade protectionism could “significantly impair the global recovery,” it said.

Opposing Protectionism

Yesterday’s three-paragraph statement from the Chinese commerce ministry didn’t refer to the tire dispute.

“China has always steadfastly opposed trade protectionism,” the ministry said, adding that the nation was “willing to continue acting in concert with other nations to promote a global economic recovery as soon as possible.”

The dumping and subsidy probes involve “some” auto and chicken imports from the U.S., it said, without specifying which ones. In June, China said it had asked the World Trade Organization to set up an experts panel to investigate U.S. restrictions on imports of Chinese poultry products.

“Chinese poultry companies have been struggling over the past couple of years amid bird flu and a flood of imports, and the financial crisis is making that worse,” Ma Chuang, vice- secretary general of the China Animal Agriculture Association, said in Beijing today. “This case is long overdue.”

Ma said about 80 percent of imported chicken came from the U.S.

Fear of Retaliation

In the U.S., pork, soybean and other farm-goods exporters urged Obama on Sept. 3 to refrain from imposing tariffs or quotas on tires from China because of the fear of retaliation against U.S. food and agriculture products.

The U.S. consulted with Chinese officials before imposing tariffs to try to work out a solution, a U.S. trade official said, speaking on condition of anonymity. The U.S. hasn’t been notified of the new dumping cases, the official said.

If China is considering the cases in retaliation for the U.S. tires decision, the U.S. could challenge that action at the WTO, the official said. The U.S. prefers holding talks to address the underlying causes of the problem in China, such as subsidies, the official said.

To contact the Bloomberg News staff for this story: Zhang Dingmin in Beijing at Dzhang14@bloomberg.net

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Yen Rises Versus Euro on Signs Trade Protectionism Increasing

By Lukanyo Mnyanda and Yasuhiko Seki

Sept. 14 (Bloomberg) -- The yen rose for a third day against the euro on speculation a trade dispute between the U.S. and China will slow the global economic recovery, boosting demand for the Japanese currency as a refuge.

The yen climbed the most against the New Zealand dollar and South African rand after China said it was investigating alleged dumping of American auto and chicken products. The pound snapped a four-day gain against the dollar as Ernst & Young LLC’s Item Club said the U.K. housing-market slump will resume next year. New Zealand’s dollar dropped after a report showed retail sales unexpectedly slid in July.

“Whenever a story of this magnitude comes out, it’s an excuse to take risk off the table,” said Neil Mellor, a currency strategist in London at BNY Mellon Corp., the world’s biggest custodian of financial assets. “The yen is the principal beneficiary.”

The yen strengthened to 131.94 per euro as of 9:50 a.m. in London, from 132.17 in New York on Sept. 11. The Japanese currency was at 90.74 against the dollar, from 90.71, after earlier appreciating to 90.21, the highest level since Feb. 12.

The dollar rose to $1.4547 per euro, from $1.4571 at the end of last week, when it reached $1.4634, the weakest level this year. The U.S. currency appreciated the most against the New Zealand dollar and the Mexican peso.

Asian and European stocks fell, with the Dow Jones Stoxx 600 Index sliding 1.4 percent. The MSCI Asia Pacific Index dropped 1.8 percent, with futures on the Standard & Poor’s 500 Index retreating 1 percent.

‘Unfair Trade Practices’

Chinese industries complain that they’re being hurt by “unfair trade practices,” the nation’s Ministry of Commerce said on its Web site yesterday. The dumping investigation relates to poultry alone, a spokesman said in Beijing today. The ministry didn’t specify the value of imports of the products.

Rising protectionism may hamper world trade and undermine the global economy’s recovery from recession, the European Central Bank said last week. The U.S. placed tariffs starting at 35 percent on $1.8 billion of tire imports from China, backing a United Steelworkers union complaint against the second-largest U.S. trading partner.

“The dollar is back in demand as the market gets worried that trade relationships between the U.S. and China are souring,” analysts led by Hans-Guenter Redeker, London-based head of currency strategy at BNP Paribas SA, wrote in a client report today. “Today, we expect equity and commodity markets to come under selling pressure.”

Risk Aversion

The dollar benefits from risk aversion because it’s the world’s main reserve currency. Japan’s currency typically rises during times of financial turmoil as the nation’s trade surplus makes it less reliant on overseas lenders.

The yen’s strength doesn’t make sense, said Jim O’Neill, head of global economic research at Goldman Sachs Group Inc.

“If I look at the underlying fundamentals, virtually everything that drove the yen stronger in its floating-exchange history isn’t there anymore,” he said in an interview on Bloomberg Television in London today. “The yen doesn’t deserve to be anywhere near this, and I don’t see it lasting.”

The pound declined from the highest level in more than a month, sliding 0.7 percent to $1.6533. It lost 0.5 percent to 87.93 pence per euro. U.K. house prices will stagnate for two years after “dipping” in the first half of 2010, the Item Club, which uses the same economic model as the Treasury, said in a report today.

Retail Sales

The so-called kiwi slid by the most in two weeks as retail sales in New Zealand declined for a second month, dropping 0.5 percent from June. That compares with the median forecast for a 0.4 percent gain, according to a Bloomberg survey of economists.

New Zealand’s dollar fell to 69.79 U.S. cents, from 70.74 cents last week. It bought 63.29 yen, from 64.17 yen.

The dollar may pare gains on speculation the Federal Reserve Board won’t rush to exit its policy of pumping liquidity into the banking system.

Federal Reserve Bank of Richmond President Jeffrey Lacker will speak today at the annual meeting of the Risk Management Association, in Charlotte, North Carolina. San Francisco Fed President Janet Yellen also speaks today on the U.S. economic outlook in the Californian city.

The euro gained 4 percent against the dollar this year amid speculation signs of a global economic recovery will boost investor appetite for higher-risk assets, such as stocks. The currency will probably trade at $1.50 by year-end, according to HSBC Holdings Plc.

Low U.S. Rates

“The low interest rate structure for many years to come in the U.S. is going to start undermining the dollar,” David Bloom, global head of foreign-exchange strategy at HSBC in London, said in an interview on Bloomberg Television. “At some stage by the end of the year, we’re going to get inklings by the ECB that they’ll be looking to tighten sometime next year.”

The three-month London interbank offered rate, or Libor, for dollar loans dropped below that of the Swiss franc on Sept. 8, making the greenback the cheapest currency to fund purchases of higher-yielding assets. The spread between three-month Libor for yen and dollar loans was 7.25 basis points on Sept. 8, according to British Bankers’ Association data.

Using the world’s reserve currency to fund carry trades became more profitable and less risky last month than with the yen for the first time since March 2008, Bloomberg data show. The difference in Sharpe ratios for dollars and yen, a measure of performance versus risk, has averaged 1.35 since May, compared with minus 0.37 since 2004. The higher the Sharpe ratio, the higher the risk-adjusted return.

‘Big Funding Currency’

“The dollar is the big funding currency,” said Jonathan Clark, vice chairman of New York-based FX Concepts Inc., the world’s largest currency hedge fund, with $9 billion in assets under management. “The reason why people are borrowing the U.S. dollar for carry trade is A: It’s very cheap to fund, and B: The expectation is it’s going to go down.”

In carry trades, investors borrow in a country with low rates and invest where returns are higher. The U.S. target rate is as low as zero, compared with 3 percent in Australia and 2.5 percent in New Zealand.

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

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Raw, Refined Sugar May Gain in New York, London, Survey Shows

By M. Shankar and Elizabeth Campbell

Sept. 14 (Bloomberg) -- Raw-sugar futures and refined-sugar contracts may climb this week, according to a survey.

Five of nine traders, analysts and brokers surveyed last week forecast that raw sugar traded in New York would gain. Four predicted a decline. Raw sugar added 5.8 percent to 22.86 cents a pound last week.

Five of nine said white sugar traded in London would rise, and four anticipated a drop. White, or refined, sugar lost 0.1 percent to $566 a metric ton last week.

Six of nine people said refined sugar’s premium over raw sweetener would widen, one expected a narrowing and two said the gap would be little changed.

Bullish on raw sugar: 5       Bearish: 4     Neutral: 0
Bullish on white sugar: 5     Bearish: 4     Neutral: 0
Widening white premium: 6     Narrow: 1      Neutral: 2

To contact the reporters on this story: M. Shankar in London at mshankar@bloomberg.net; Elizabeth Campbell in New York at ecampbell14@bloomberg.net

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Oil Falls for Second Day on Doubts Over Pace of Demand Recovery

By Yee Kai Pin and Gavin Evans

Sept. 14 (Bloomberg) -- Crude oil fell for a second day as higher U.S. fuel stockpiles raised concern that gains in prices may have outpaced the recovery in the global economy.

Oil slipped to its lowest in almost a week before a report tomorrow in the U.S., the world’s largest energy consumer, which may show retail spending barely changed in August if gasoline and autos were excluded. The country’s stockpiles of distillate have climbed to their highest since 1983, according to data from the Energy Department last week.

“The market seemed to be telling traders that they had arrived at the end of the party, and that existing prices had long ago discounted everything bullish,” said Peter Beutel, president of trading adviser Cameron Hanover Inc. in New Canaan, Connecticut. “The market decided that the resistance overhead was just too strong to break.”

Crude oil for October delivery fell as much as $1.27, or 1.8 percent, to $68.02 a barrel in after-hours electronic trading on the New York Mercantile Exchange. The contract traded at $68.13 at 2:36 p.m. in Singapore.

Futures tumbled 3.7 percent to $69.29 a barrel on Sept. 11, dropping the most in two weeks and snapping a four-day climb. Asian shares declined today, mirroring a retreat on Wall Street that reflected concern over earnings prospects.

“We’re still waiting to see if the fundamentals can catch up with the sentiment in the oil market,” said Toby Hassall, a research analyst at CWA Global Markets in Sydney. “There definitely seems to be a bit of significant resistance being encountered once we get into the $70s.”

Lower Demand

Oil has gained 53 percent this year as rising equities and a weaker dollar bolstered investment in commodities. The greenback was little changed after trading last week at its lowest since December.

Prices are pre-empting the recovery in global demand, according to Hassall. The U.S. is entering a so-called “shoulder period” in demand with the end of the summer last week and before the start of the Northern Hemisphere winter, when heating fuel consumption increases.

U.S. stockpiles of distillate, including heating oil and diesel, rose a third week last week to 165.6 million barrels, 27 percent more than a year earlier, the Energy Department said on Sept. 10.

“If we do have a mild winter and we don’t see much of a drawdown in distillate stocks, that may limit the upside,” Hassall said.

The country’s gasoline stockpiles rose last week to 207.2 million barrels, the first increase in seven weeks, according to the Energy Department.

“The ‘driving season’ is over and supplies are greater today than in May,” Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania, said in a note to clients.

Long Positions

Hedge fund managers and other large speculators increased their net-long position in New York crude oil futures in the week to Sept. 8, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 33,112 contracts on the New York Mercantile Exchange, the Washington-based commission said Sept. 11 in its Commitments of Traders report. Net-long positions rose by 4,518 contracts, or 16 percent, from a week earlier.

“Crude oil is just following weak fundamentals,” said Ken Hasegawa, a commodity derivative sales manager at broker Newedge in Tokyo. “If the price goes down below $68, then it’s possible to go down to $66.”

Brent crude oil for October settlement fell as much as 98 cents, or 1.5 percent, to $66.71 a barrel on the London-based ICE Futures Europe exchange. The contract traded at $66.75 at 2:35 p.m. Singapore time. It dropped 3.1 percent to $67.69 on Sept. 11, the biggest decline since Aug. 31.

To contact the reporters on this story: Yee Kai Pin in Singapore at kyee13@bloomberg.net; Gavin Evans in Wellington at gavinevans@bloomberg.net.

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Copper Slumps Daily Limit in Shanghai on Stockpiles, Production

By Glenys Sim

Sept. 14 (Bloomberg) -- Copper tumbled by the exchange- imposed 5 percent daily limit in Shanghai as expanding inventories and growing production in China fuel concern that supply will outpace demand.

Inventories tallied by the London Metal Exchange climbed for an 11th day to 318,325 metric tons yesterday, the highest level since May 27. Stockpiles of copper in Shanghai rose for the seventh time last week to 97,396 tons, the highest level in more than two years.

“There are concerns that base metals prices earlier increased more quickly than justified by fundamentals,” David Moore, commodity strategist at Commonwealth Bank of Australia, said in an e-mail today.

Copper for December delivery on the Shanghai Futures Exchange fell as much as 2,490 yuan from the previous settlement price to 47,160 yuan ($6,907) a metric ton.

Three-month delivery copper fell as much as 2.9 percent to $6,070 a ton on the London Metal Exchange, and traded at $6,905 a ton at 9:21 a.m. in Singapore. The contract is down for a fourth day, the longest slump since the five-day decline ended July 8. December-delivery copper in New York lost as much as 3 percent to $2.7625 a pound.

“The Chinese data showed that China’s copper imports fell in August from July, and China’s production of a number of metals is increasing,” said Moore.

China’s imports of copper and the metal’s products in August dropped for a second month to 325,098 tons, 20 percent down from a month earlier, according to data on Bloomberg. The country’s production of copper in August rose 9 percent from the previous month to 365,000 tons.

Zinc, Lead

December-delivery zinc in Shanghai lost as much as 765 yuan, or 5 percent from the previous settlement, to 14,515 yuan a ton. Zinc in London slid as much as 1.9 percent to $1,830 a ton

“Zinc is being dragged down by lead as investors view them as ‘sister metals’, but in fact the problems we’ve seen in lead has very little to do with zinc at all,” Tao Jinfeng, an analyst at Jiangsu Donghua Futures Co., said from Tianjin.

Lead output in China expanded in August to the highest level this year, even as the country cracked down on smelters after thousands of children were poisoned. China is estimated to produce 3.14 million tons and consume 2.87 million tons of the metal this year, according to Feng Juncong, an analyst at state- backed researcher Beijing Antaike Information Development Co.

Lead declined for a fourth day, the longest losing streak since the four-day period ended April 28, by as much as 1.5 percent to $2,035 a ton.

Among other LME-traded metals, aluminum fell 0.7 percent to $1,832 a ton, nickel dropped 2.7 percent to $16,500 a ton, while tin hadn’t traded as of 9:50 a.m. in Singapore.

To contact the reporter on this story: Glenys Sim in Singapore at Gsim4@bloomberg.net

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Gold Falls, Ending 2-Day Advance, as Dollar’s Gain Saps Demand

By Kim Kyoungwha

Sept. 14 (Bloomberg) -- Gold declined as gains by the dollar and falling oil prices sapped demand for the precious metal as an alternative investment.

Bullion, which typically moves inversely to the dollar, snapped a two-day advance as crude oil dropped to a one- week low and Asian stocks fell. The Dollar Index, a six- currency gauge of the U.S. currency’s value, rose 0.4 percent after six days of declines.

“Gold is in a modest consolidation stage as the dollar rebounded,” said Hwang Il Doo, a senior trader with KEB Futures Co. in Seoul. “The upward momentum over the longer term remains intact as more people are looking for shelter from a potentially inflationary environment.”

Gold for immediate delivery fell 0.4 percent to $1,002.92 an ounce at 1:24 p.m. in Singapore. The metal reached $1,011.95 on Sept. 11, an 18-month high, and has gained 13 percent this year. The dollar index is down 5.4 percent this year.

The MSCI Asia Pacific Index of regional shares lost 1.6 percent, ending two days of gains, as commodity prices fell and a stronger yen hurt Japanese exporters. Oil dropped as much as 1.8 percent on speculation crude’s rally to more than $72 a barrel last week outpaced the recovery in the global economy.

Outlook Cautious

UBS AG recommended investors sell gold and silver, citing a jump in speculative buying of the precious metals. Net speculative long positions in bullion were at a record 29.02 million ounces on the Comex division of the New York Mercantile Exchange as of Sept. 8, UBS said in a Sept. 12 report. That was 2.2 million more than the previous record in February, while net long positions in silver rose to 304 million ounces, the largest since July 2008, the report said.

“Considering the speed of the increase and on the absolute level of the net speculative position, we are cautious about the near-term outlook for the gold price,” John Reade, a UBS analyst, wrote in a note. “We recommend that nimble investors take profits on any long gold and silver positions, looking to re-enter after a correction.”

UBS said it held its one-month forecast for gold at $950 an ounce and expected the metal to trade higher in 2010.

Gold holdings in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, were unchanged at 1,077.63 metric tons as of Sept. 11, according to the company’s Web site.

Among other precious metals for immediate delivery, silver fell 1.6 percent to $16.475 an ounce and platinum slumped 1.3 percent to $1,301.25 an ounce. Palladium fell 0.3 percent to $291.25.

To contact the reporter on this story: Kyoungwha Kim in Singapore at Kkim19@bloomberg.net

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Stiglitz Says Banking Problems Are Now Bigger Than Pre-Lehman

By Mark Deen and David Tweed

Sept. 14 (Bloomberg) -- Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.

“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview yesterday in Paris. “The problems are worse than they were in 2007 before the crisis.”

Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”

A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.’s assets have grown and Citigroup Inc. remains intact. In the U.K., Lloyds Banking Group Plc, 43 percent owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.

While Obama wants to name some banks as “systemically important” and subject them to stricter oversight, his plan wouldn’t force them to shrink or simplify their structure.

Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.

G-20 Steps

“We aren’t doing anything significant so far, and the banks are pushing back,” said Stiglitz, a Columbia University professor. “The leaders of the G-20 will make some small steps forward, given the power of the banks” and “any step forward is a move in the right direction.”

G-20 leaders gather Sept. 24-25 in Pittsburgh and will consider ways of improving regulation of financial markets and in particular how to set tighter limits on remuneration for market operators. Under pressure from France and Germany, G-20 finance ministers earlier this month reached a preliminary accord that included proposals to reduce bonuses and linking compensation more closely to long-term performance.

“It’s an outrage,” especially “in the U.S. where we poured so much money into the banks,” Stiglitz said. “The administration seems very reluctant to do what is necessary. Yes they’ll do something, the question is: Will they do as much as required?”

Global Economy

Stiglitz, former chief economist at the World Bank and member of the White House Council of Economic Advisers, said the world economy is “far from being out of the woods” even if it has pulled back from the precipice it teetered on after the collapse of Lehman.

“We’re going into an extended period of weak economy, of economic malaise,” Stiglitz said. The U.S. will “grow but not enough to offset the increase in the population,” he said, adding that “if workers do not have income, it’s very hard to see how the U.S. will generate the demand that the world economy needs.”

The Federal Reserve faces a “quandary” in ending its monetary stimulus programs because doing so may drive up the cost of borrowing for the U.S. government, he said.

“The question then is who is going to finance the U.S. government,” Stiglitz said.

Stiglitz gave the interview before presenting a report to French President Nicolas Sarkozy that urged world leaders to drop an obsession for focusing on gross domestic product in favor of broader measures of prosperity.

GDP’s Shortcomings

“GDP has increasingly become used as a measure of societal well being and changes in the structure of the economy and our society have made it increasingly poor one,” Stiglitz said.

Assessing government’s contribution to economic output, which ranges from 39 percent in the U.S. to 48 percent in France, is one of the shortcomings of the GDP model, as is its difficulty in estimating improvements in quality of products such as cars instead of just quantity, Stiglitz said.

Similarly, increased household debt may drive up output numbers, even though that doesn’t amount to a real increase in wealth, he added.

While Stiglitz doesn’t recommend dropping GDP altogether, he wants governments to consider such matters, along with issues of environmental sustainability, in policy making.

“Most governments make a fetish out of it. If you take one message out of our report, make it avoid GDP fetishism,” he said. “The message is to encourage political leaders away from that.”

To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.netDavid Tweed in Paris at dtweed@bloomberg.net

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Danny Pang Autopsy Shows No Foul Play, Coroner Says

By Edvard Pettersson and Jeran Wittenstein

Sept. 14 (Bloomberg) -- An autopsy on Danny Pang, the indicted founder of Private Equity Management Group Inc. who died on Sept. 12 while free on $1 million bail, showed no signs of foul play, the Orange County Coroner’s office said.

Pang, of Newport Beach, California, was 42. He was accused by the U.S. Securities and Exchange Commission of lying to Taiwanese investors about his credentials, forging insurance documents and paying existing investors with funds raised from new ones, while claiming the returns came from investments in life insurance policies.

The coroner’s office completed its autopsy on Pang on Sept. 13 and said in a statement posted online that there is no suspicion of foul play. The case is still being investigated pending toxicology results that should take about two to three months to complete. Mitchell Sigal, deputy at the coroner’s office, declined to provide additional details when reached by telephone.

“Pang’s death is a surprise but it won’t make any difference; investors won’t get their money back,” said Michael On, president of Beyond Asset Management Co. in Taipei. “People have to realize there’s no windfall from these investments.” On said he had no money invested with Pang.

Emergency Order

Pang pleaded not guilty on July 27 to charges in a separate criminal case that he structured cash withdrawals to avoid having to report them. He was charged in an indictment with two counts of making a total of about 50 cash withdrawals in amounts of as high as $9,900 to evade a U.S. law that requires reporting cash withdrawals of $10,000 or more.

The financier was arrested in the criminal case in April, shortly after the SEC obtained an emergency order freezing the assets of Irvine, California-based PEMGroup.

The company’s investors, including eight financial institutions and about 35 wealthy individuals, have $823 million invested with PEMGroup, according to a May 6 report by the receiver. The underlying assets may be worth $193 million to $360 million, the receiver said in an August status report.

Pang’s death will not add to losses at Taiwanese banks, the Economic Daily News said, citing banks including Hua Nan Commercial Bank Ltd. Taiwan banks have already realized Private Equity Management-related losses of NT$9.67 billion ($296 million), the paper said.

Taiwan Investors

“Pang’s death won’t affect our attempts to recover our investments as the assets of the group are now in receivership as appointed by the SEC, and the group of banks here in Taiwan are in constant communication with the receiver,” said York Lai, a spokesman for Hua Nan said, which sold about $200 million of PEMGroup related products. The bank made provisions of NT$850 million in the first-half for PEM-related losses, Lai said.

Taiwan’s financial regulator in May asked the island’s financial institutions to repurchase securities they sold from PEMGroup to investors, so Pang’s death won’t affect them, Chang Ming-daw, head of the banking bureau of the Financial Supervisory Commission said in Taipei today.

“PEMGroup is a legal entity and so Pang’s death isn’t likely to affect the process by the Taiwanese banks to recover their investments,” Chang said. The regulator hasn’t received notification from the SEC about Pang’s death, he said.

Standard Chartered Bank in Taiwan, one of the six financial institutions to have sold PEMGroup products, declined to comment on Pang’s death. The lender had made provisions of $170 million in the first half for PEMGroup-related investements, the lender said in an e-mailed reply to questions.

In the past, U.S. prosecutors have dismissed cases against defendants upon receipt of a death certificate, said Thomas Mrozek, a spokesman for the U.S. Attorney’s Office in Los Angeles.

The case is U.S. v. Pang, 09-00161, U.S. District Court, Central District of California (Santa Ana.)

To contact the reporter on this story: Edvard Pettersson in Los Angeles at epettersson@bloomberg.net; Jeran Wittenstein at jwittenstei1@bloomberg.net

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BlackRock Plans Global Trading Network to Reduce Client Costs

By Sree Vidya Bhaktavatsalam

Sept. 14 (Bloomberg) -- BlackRock Inc. is building a global trading network to cut costs for clients as it wraps up the acquisition of Barclays Global Investors to become the world’s biggest money manager.

The system will enable BlackRock to buy and sell more securities for customers, reducing its reliance on Wall Street brokers, the New York-based company said in a memo to senior executives. Minder Cheng, BGI’s global chief investment officer of equity and capital markets, will lead the effort, according to the memo, portions of which were obtained by Bloomberg News.

BlackRock, co-founded 21 years ago by Chief Executive Officer Laurence Fink, will manage about $3 trillion in assets after completing the $13.5 billion purchase of Barclays Plc’s investment unit later this year. The company will continue to trade with outside brokers such as Goldman Sachs Group Inc. after the new network is operating.

“In a potentially low-return environment, if they can save a few basis points, they can enhance returns for investors,” Geoff Bobroff, an independent fund consultant in East Greenwich, Connecticut, said in an interview. “BlackRock as a firm is very technology oriented, and for them to start such a platform would make sense.”

The company’s BlackRock Solutions unit uses proprietary systems to price fixed-income securities, helping it become an adviser to institutions and governments on how to dispose of debt that has fallen in value since the onset of the global credit crisis in late 2007. BlackRock was selected in July as one of nine asset managers to buy toxic assets from banks under the U.S. government’s Public Private Investment Program.

Cost Efficiencies

Bobbie Collins, a spokeswoman for BlackRock, declined to comment on the memo, which was reported earlier by the Financial Times.

BlackRock’s trading system will “fully realize the cost efficiencies and trading opportunities across all asset classes as we become one of the largest trading operations in the world,” according to the memo.

Cheng joined San Francisco-based BGI in 1999. He oversees active and passive equities, securities lending, and cash products.

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net.

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U.K. Stocks Drop as Mining Shares Fall; Johnson Matthey Slides

By Sarah Jones

Sept. 14 (Bloomberg) -- U.K. stocks slid, led by Eurasian Natural Resources Corp. and Kazakhmys Plc as a measure of mining shares retreated from the steepest weekly advance since July.

ENRC, a producer of steelmaking raw materials in Kazakhstan, and Kazakhmys dropped more than 2.4 percent as base metals retreated. Johnson Matthey Plc lost 3.9 percent as Morgan Stanley downgraded the shares.

The benchmark FTSE 100 Index slipped 30.54, or 0.6 percent, to 4,980.93 at 8:47 a.m. in London. The FTSE All-Share Index sank 0.6 percent and Ireland’s ISEQ Index lost 0.2 percent.

The FTSE 100 has rebounded 42 percent since its March low, pushing the measure’s valuation to about 76 times its companies’ reported earnings, the most expensive level in seven years, according to weekly data compiled by Bloomberg.

ENRC dropped 3.8 percent to 837 pence as the FTSE 350 Mining Index retreated 2.1 percent. The measure last week rallied 7.4 percent, the biggest five-day advance since July 24.

Kazakhmys declined 2.4 percent to 1,070 pence and Xstrata Plc dropped 1 percent to 915.5 pence as metals including copper, nickel and tin retreated on the London Metal Exchange.

Copper tumbled by the exchange-imposed 5 percent daily limit in Shanghai as expanding inventories and growing production in China fueled concern that supply will outpace demand.

Johnson Matthey dropped 3.9 percent to 1,390 pence after Morgan Stanley downgraded the producer of a third of all autocatalysts to “equal weight” from “overnight.”

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net.

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German Stocks Decline as Deutsche Bank, Commerzbank Retreat

By Julie Cruz

Sept. 14 (Bloomberg) -- German stocks fell for the first time in seven days, led by lenders, as Joseph Stiglitz said the U.S. has failed to fix the underlying problems of its banking system after the collapse of Lehman Brothers Holdings Inc.

The benchmark DAX Index dropped 1 percent to 5,570.73 as of 9:24 a.m. in Frankfurt, ending the longest winning streak since July. A 52 percent rebound since March 6 left the measure valued at 48 times its companies’ reported earnings, the most expensive level since December 2003, according to weekly Bloomberg data. The broader HDAX slid 1.1 percent today.

“In the U.S. and many other countries, the too-big-to- fail banks have become even bigger,” Stiglitz, the Nobel Prize- winning economist, said in an interview yesterday in Paris. “The problems are worse than they were in 2007 before the crisis.”

Deutsche Bank AG, Germany’s biggest bank, slipped 2.3 percent to 48.62 euros as analysts at Nomura Holdings Inc. lowered its recommendation to “reduce” from “buy.” Commerzbank AG, the second-largest, retreated 3.7 percent to 7.98 euros.

To contact the reporter on this story: Julie Cruz in Frankfurt at jcruz6@bloomberg.net.

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French Stocks: BNP, Club Med, SocGen, Partouche, Peugeot

By Sarah Jones

Sept. 14 (Bloomberg) -- France’s CAC 40 Index retreated 45.35, or 1.2 percent, to 3689.54 at 10:20 a.m. in Paris, trimming some of last week’s 3.8 percent advance. The SBF 120 Index lost 1.2 percent.

The following are among the most active stocks in the French markets today. Stock symbols are in parentheses.

BNP Paribas SA (BNP FP) fell 1.23 euros, or 2.3 percent, to 51.70 after Nomura Holdings Inc. lowered its recommendation for France’s biggest bank by market value to “reduce” from “buy.”

Shares of Societe Generale SA (GLE FP), the second- largest, were also downgraded at Nomura to “reduce” from “neutral.” The shares fell 1.47 euros, or 2.9 percent, to 49.34.

Club Mediterranee SA (CU FP) climbed 41 cents, or 3.2 percent, to 13.31 euros. Europe’s largest resort company has no plan to raise funds, Investir reported, citing an interview with Chief Executive Officer Henri Giscard d’Estaing.

Groupe Partouche SA (PARP FP) sank 36 cents, or 11 percent, to 3.06 euros. France’s biggest casino operator said third-quarter revenue fell to 107 million euros ($155 million) from 116.4 million euros a year earlier.

PSA Peugeot Citroen (UG FP) dropped 99 cents, or 4.6 percent, to 20.38 euros. Credit Suisse Group AG lowered its recommendation for Europe’s second-largest carmaker to “underperform” from “outperform,” citing the stock’s increase this year and the possible size of a decline in sales as incentive plans end.

Total SA (FP FP) lost 56.6 cents, or 1.4 percent, to 41.22 euros. Crude oil fell for a second day as higher U.S. fuel stockpiles raised concern that gains in prices may have outpaced the recovery in the global economy.

To contact the reporters on this story: Sarah Jones in London at sjones35@bloomberg.net.

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Asian Stocks Fall Amid Valuation Concerns; Honda Drops on Yen

By Shani Raja

Sept. 14 (Bloomberg) -- Asian stocks fell, dragging the MSCI Asia Pacific Index from a one-year high, amid concern a six-month rally had overvalued prospects for an earnings recovery in the region.

Honda Motor Co., which gets 47 percent of its sales in North America, retreated 3 percent in Tokyo on concern the yen’s appreciation to a seven-month high against the dollar will reduce the value of overseas revenue. National Australian Bank Ltd., the nation’s biggest by assets, dropped 3.2 percent in Sydney after Treasurer Wayne Swan said unemployment will climb. Santos Ltd., Australia’s No. 3 oil producer, sank 3.7 percent as commodity prices declined.

“Expectations may be beginning to moderate regarding the ongoing strength of the recovery,” said Tim Schroeders, who helps manage about $1 billion at Pengana Capital Ltd. in Melbourne. “Investors will be concentrating on discerning real underlying growth in the global economy.”

The MSCI Asia Pacific Index sank 1.8 percent to 115.72 as of 5:53 p.m. in Tokyo after ending last week at its highest level since Sept. 9, 2008. The gauge has climbed 64 percent from a five-year low on March 9 as government stimulus measures worldwide pulled economies out of recession.

Japan’s Nikkei 225 Stock Average fell 2.3 percent. Real- estate investor K.K. DaVinci Holdings tumbled 14 percent in Tokyo after saying it wasn’t likely to reach agreement on a loan extension. Hong Kong’s Hang Seng Index dropped 1.1 percent, led by Li & Fung Ltd., which retreated for a second day from a 15- month high. Australia’s S&P/ASX 200 Index declined 1.4 percent.

Consumer Confidence

China’s Shanghai Composite Index rose 1.2 percent. Shandong Minhe Animal Husbandry Co. climbed 10 percent, leading gains among poultry producers, after the government announced a probe into U.S. chicken imports.

Futures on the U.S. Standard & Poor’s 500 Index dropped 1 percent. The gauge dipped 0.1 percent on Sept. 11 even after a report showed the Reuters/University of Michigan preliminary index of consumer sentiment rose more than economists had estimated in September.

U.S. Treasuries rose on speculation declines in Asian stocks and the euro will bolster demand for the safest assets. Philippe Chaumel, a Paris-based money manager at Rothschild & Cie Gestion who beat 94 percent of his peers in the past year, said he’s switching investments into so-called defensive stocks.

The MSCI Asia Pacific Index gained 4.4 percent last week, its biggest weekly advance since the period ended July 24. The average price of the gauge’s companies has climbed to 24 times estimated net income, up from 15 times at the index’s March low.

Stronger Yen

Profit reports in the region have helped fuel the six-month rally, with 35 percent of the 642 companies in the MSCI Asia Pacific beating analyst predictions in the latest quarter, while 21 percent missed, according to data compiled by Bloomberg. Net income in the latest period still tumbled 47 percent from a year earlier, the data showed.

Honda fell 3 percent to 2,780 yen as the yen appreciated versus the dollar to as much as 90.21 today, a level not seen since Feb. 12. A stronger yen reduces the value of overseas sales at Japanese companies when converted into their home currency.

Sony Corp., the world’s second-biggest maker of consumer electronics, dropped 2.4 percent to 2,425 yen. Toyota Motor Corp., which got 31 percent of its revenue last fiscal year in North America, lost 2.6 percent to 3,740 yen.

Japan’s large manufacturers expect the yen to trade at an average of 94.85 this year, according to the Bank of Japan’s most recent quarterly Tankan survey.

Australia’s Jobless Rate

“The current exchange rate will adversely affect companies that base their forecasts on 95 yen per dollar,” said Yoshinori Nagano, a senior strategist at Tokyo-based Daiwa Asset Management Co., which oversees the equivalent of $95 billion. “There aren’t a lot of players in the market and that amplifies declines and gains in equities.”

In Sydney, National Australia shares dropped 3.2 percent to A$28.10. Australia & New Zealand Banking Group Ltd. declined 3 percent to A$22.01.

Australia’s unemployment rate will rise from 5.8 percent, boosting the need to maintain the government’s economic stimulus measures, Treasurer Swan said in his weekly economic note released yesterday.

“Ripping the stimulus out prematurely would only pull the rug out from under the recovery, undermine confidence and threaten jobs,” Swan wrote.

Lehman Bankruptcy

HSBC Holdings Plc, the London-based bank that has the biggest representation in the Hang Seng Index, lost 0.9 percent to HK$83.85. Joseph Stiglitz, a Nobel Prize-winning economist, said in an interview in Paris over the weekend that the U.S. banking system is in a worse state than before the seizure in credit markets and collapse of Lehman Brothers Holdings Inc.

Tomorrow is the one-year anniversary of Lehman’s bankruptcy filing, which exacerbated the credit crunch and helped drag the global economy into its worst slowdown since World War II. Losses from the credit crisis at the world’s biggest financial institutions since the start of 2007 have climbed to more than $1.6 trillion.

New Zealand’s statistics office today reported a 0.5 percent decline in the country’s retail sales, missing the 0.4 percent increase anticipated by economists in a Bloomberg survey.

Fisher & Paykel Appliances Holdings Ltd., the nation’s biggest maker of cookers and washers, lost 1.3 percent to 77 New Zealand cents in Wellington. Warehouse Group Ltd., the biggest discount retailer, dropped 0.7 percent to NZ$4.22.

Copper, Oil

K.K. DaVinci, which manages real-estate investment funds, tumbled 14 percent to 12,350 yen following the statement on its loan extension.

Hong Kong’s Li & Fung, the biggest supplier of clothes and toys to Wal-Mart Stores Inc. and Target Corp. sank 3.8 percent to HK$28.10, adding to a 3.3 percent drop on Sept. 11. The stock closed on Sept. 10 at the highest since May 28, 2008.

In Sydney, Santos sank 3.7 percent to A$15.30, while Rio Tinto Group, the world’s No. 3 mining company, fell 2 percent to A$58.05. Mitsui & Co., which counts commodities as its biggest source of profit, lost 1.5 percent to 1,215 yen in Tokyo.

Copper futures in New York dropped 2.4 percent today, the fourth day of declines. A gauge of six metals in London lost 3.5 percent on Sept. 11. Crude oil dropped 1.1 percent today, adding to a 3.7 percent slump on Sept. 11.

The Australian and New Zealand dollars fell today, retreating from last week’s strongest levels since August 2008, following the declines in commodities, which account for more than half of the two nations’ exports.

Government Probe

Shandong Minhe, which breeds chickens, surged 10 percent to 15.05 yuan, while rival Shanghai Dajiang (Group) Stock Co. added 10 percent to 9.03 yuan on speculation demand for their products will rise.

The Chinese government announced a dumping and subsidy probe into U.S. imports two days after President Barack Obama imposed tariffs on tires from the Asian nation.

Among stocks that gained today, Japan Airlines Corp. jumped 8 percent to 176 yen after people familiar with the plan said American Airlines may buy a stake in the carrier. Japan Airlines, which has received three government bailouts since 2001, is also discussing possible stake sales to Delta Air Lines Inc. and Air France-KLM, people acquainted with those negotiations have said.

Japan Air is talking with other carriers to strengthen its business, spokeswoman Sze Hunn Yap said in Tokyo, declining to comment on discussions or possible investments.

Alibaba.com Ltd. climbed 3.7 percent to HK$21.15 in Hong Kong. The operator of China’s biggest trading Web site is attracting more sellers from Europe and has 1.4 million users in the region after boosting its marketing activity there, according to Maggie Choo, Alibaba’s director for Europe.

To contact the reporter for this story: Shani Raja in Sydney at sraja4@bloomberg.net.

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Japan Stocks Drop on Stronger Yen, Concern Over Bank Stability

By Masaki Kondo

Sept. 14 (Bloomberg) -- Japanese stocks fell, sending the Topix index to its lowest level in almost seven weeks, after the yen appreciated against the dollar and on concern the global banking system has yet to stabilize.

Canon Inc., which gets 28 percent of its sales from the Americas, dropped 3.4 percent. Honda Motor Co., Japan’s No. 2 carmaker, retreated 3 percent. The yen appreciated to 90.21 to the dollar, while manufacturers are expecting about 95 yen. Mizuho Financial Group Inc. dropped 2 percent after Nobel Prize- winning economist Joseph Stiglitz said the problems of banks are bigger than they were before the collapse of Lehman Brothers Holdings Inc.

“The current exchange rate will adversely affect companies that base their forecasts on 95 yen per dollar,” said Yoshinori Nagano, a senior strategist at Tokyo-based Daiwa Asset Management Co., which oversees the equivalent of $95 billion. “There aren’t a lot of players in the market and that amplifies declines and gains in equities.”

The Nikkei 225 Stock Average dropped 2.3 percent to close at 10,202.06 in Tokyo. The broader Topix index lost 1.7 percent to 934.05, its lowest close since July 29. Almost six stocks fell for each that rose.

The number of shares traded in Tokyo has stayed below the 12-month average in all but two of the past 30 days. Investors stayed on the sidelines on concern a 45 percent rally in the Nikkei since March outpaced the outlook for company earnings. Stocks on the Nikkei trade at 43 times their estimated earnings for this year, the highest level among the gauges of the world’s three biggest markets, according to data compiled by Bloomberg.

Stronger Yen

The yen appreciated against the dollar to as much as 90.21 today, a level not seen since Feb. 12. A stronger yen reduces the value of overseas sales at Japanese companies when converted into their home currency. Japan’s large manufacturers expect the yen to trade at an average of 94.85 this year, according to the Bank of Japan’s most recent quarterly Tankan survey.

Canon, the world’s biggest maker of digital cameras, slid 3.4 percent to 3,450 yen. Honda, which gets 47 percent of its sales in North America, dropped 3 percent to 2,780 yen. Makers of electronics and cars were the biggest drags on the Topix, followed by banks.

“Even a slight appreciation of the yen has an impact on earnings,” said Daisuke Shimazu, an investment manager at Sumitomo Trust Banking Co. “There is a limit to cost cuts.”

One Year

Mizuho, Japan’s No. 2 listed bank, slid 2 percent to 200 yen and was the most actively traded stock. Market leader Mitsubishi UFJ Financial Group Inc. fell 1.7 percent to 537 yen. Stiglitz said in a Bloomberg TV interview yesterday that financial companies that are too big to fail have become even bigger and the problems are worse than they were in 2007 before a global financial crisis that began in 2008.

Tomorrow is the one-year anniversary of Lehman’s bankruptcy filing, which accelerated the freezing of credit markets and helped drag the global economy into its worst slowdown since World War II. Losses from the credit crisis at the world’s biggest financial institutions since the start of 2007 have swelled to more than $1.6 trillion.

“Financial companies are getting bigger to survive, resulting in fewer players in the industry,” said Daiwa Asset’s Nagano. “The collapse of one bank will have a much bigger impact on the global financial system than before.”

Japan Airlines Corp. soared 8 percent to 176 yen and was the biggest winner on the Nikkei. American Airlines Inc. may buy a stake in the company, people familiar with the plan said. Japan Airlines, which has received three government bailouts since 2001, is also discussing possible stake sales to Delta Air Lines Inc. and Air France-KLM, people familiar with those negotiations have said.

To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net.

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