Japan’s Dec. Tankan Business Confidence Survey: Summary (Table)

By Shizuka Muragishi

Dec. 15 (Bloomberg) -- Following is the summary table for the Tankan survey from the Bank of Japan in Tokyo.

===============================================================================
                    March   Dec.     Dec.    Sept.     June    March     Dec.
                    2009    2008     2008     2008     2008     2008     2007
                Forecast  Actual  Expected*
===============================================================================
                ---------------------Diffusion Index Level--------------------
Manufacturing:
Large                -36      -24       -4       -3        5       11       19
Medium               -45      -24      -12       -8       -2        5       10
Small                -48      -29      -25      -17      -10       -6        2
Non-manufacturing:
Large                -14       -9       -1        1       10       12       16
Medium               -32      -21      -17      -12       -5       -3        2
Small                -42      -29      -31      -24      -20      -15      -12
All industries        -38      -24      -19      -14       -7       -4        2

===============================================================================
                  March     Dec.     Dec.    Sept.     June    March     Dec.
                   2009     2008     2008     2008     2008     2008     2007
                Forecast  Actual  Expected*
===============================================================================
                -------------------Change from Prior Report-------------------
Manufacturing:
Large                -12      -21       -1       -8       -6       -8       -4
Medium               -21      -16       -4       -6       -7       -5        0
Small                -19      -12       -8       -7       -4       -8        1
Non-manufacturing:
Large                 -5      -10       -2       -9       -2       -4       -4
Medium               -11       -9       -5       -7       -2       -5       -2
Small                -13       -5       -7       -4       -5       -3       -2
All industries        -14      -10       -5       -7       -3       -6       -2
===============================================================================

NOTE1: Expected value is the forecast from the previous Tankan report. NOTE2: Sample enterprises has been revised from the March 2007 release based on the most updated population results.

Source: Bank of Japan http://www.boj.or.jp/en/

To contact the reporter on this story: Shizuka Muragishi in Tokyo at smuragishi@bloomberg.net

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Treasury Benefits From ‘Massive Paranoia’ as Bailout Cost Falls

By Matthew Benjamin and Liz Capo McCormick

Dec. 15 (Bloomberg) -- Bill Clinton was forced to abandon spending initiatives to boost the economy at the start of his presidency when advisors warned him that the borrowing needed to fund the programs would push interest rates higher. President- elect Barack Obama may not have the same problem.

While the total amount of U.S. government debt outstanding rose to $10.7 trillion in November from $9.15 trillion a year earlier, the amount of interest paid in the last two months fell by $10 billion, according to the Treasury Department.

Instead of shunning the U.S., where losses on subprime mortgages in 2007 triggered a global seizure in credit markets that led to the downfall of securities firms Bear Stearns Cos. and Lehman Brothers Holdings Inc., investors can’t get enough Treasuries. Even as estimates of Obama’s stimulus package and the budget deficit rise to a record $1 trillion, demand continues to increase as investors flee risky assets around the world and put their cash into U.S. bonds paying, in some cases, nothing in yield just to ensure the return of their principal.

“You still have a massive paranoia in the marketplace and you’ve got that safety-at-any-cost mentality,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “People are not buying Treasury bills because they think the yields are attractive. They are buying them because they are afraid to put money anywhere else.”

Foreign Demand

Foreign central banks and other institutions are accumulating Treasuries at the fastest pace since 1988, boosting their holdings 12 percent since September, compared with a 7.7 percent increase last quarter, according to the Federal Reserve.

Purchases accelerated even as the yield on the benchmark two-year Treasury note tumbled to 0.76 percent last week from this year’s peak of 3.11 percent on June 13. Rates on three- month bills turned negative on Dec. 9 for the first time. The same day, the U.S. sold $30 billion of four-week bills at a zero percent rate. Yields on two-, 10- and 30-year Treasuries are the lowest since the U.S. began regularly selling those securities.

The drop in yields drove bond prices higher, pushing returns to 12.4 percent on average this year, the best performance since they gained 13.4 percent in 2000, according to New York-based Merrill Lynch & Co.’s U.S. Treasury Master Index. The returns compare with a drop of 40 percent in the Standard & Poor’s 500 Index and average losses of 15 percent in Merrill Lynch’s broadest corporate bond index.

‘Raw Fear’

“This is not about return and yield and value; investors are functioning out of raw fear,” said Barr Segal, a managing director at Los Angeles-based TCW Group Inc., which oversees $90 billion in fixed-income assets. At the same time, “this is fabulous for the Treasury because they are borrowing at virtually nothing,” he said.

Japan’s bond market suggests that low yields may remain for a sustained period. In an effort to revive sagging growth in the 1990s, the world’s second largest economy ran its national debt to 1.5 times of gross domestic product. Yields on Japanese bonds are near the lowest in three years, with the country’s benchmark 10-year bond paying 1.40 percent, compared with 2.57 percent in the U.S. The national debt in the U.S. is 72 percent of GDP.

“It’s good news,” said James Horney, director of federal fiscal policy at the Center on Budget and Policy Priorities in Washington. “Even though we’re borrowing larger amounts of money, the total amount we’re going to pay in interest is going to be somewhat lower.”

Stimulus Package

Interest was $92.5 billion from August through November 2007 on the $9.15 trillion in total debt outstanding, resulting in interest expense of 1.01 percent. In the same period a year later, interest was $87.5 billion on $10.66 billion in total debt, dropping the expense to 0.8 percent.

While the median estimate of 49 economists and strategists is for 10-year Treasury yields to end 2009 at 3.65 percent, that’s still below the average of 6.91 percent paid on the securities since 1962. The security helps determine corporate and consumer borrowing rates.

Obama plans an economic stimulus package that may approach $1 trillion, in addition to a middle-class tax cut and universal health care, which may add $4 trillion or more to the national debt over 10 years, according to the Tax Policy Center in Washington and health-care economists.

The U.S. already posted a record $401.6 billion budget shortfall for the first two months of fiscal 2009, which began Oct. 1, according to a Treasury report last week. The largest postwar budget deficit by the U.S. was $412.7 billion in 2004.

“The role of the deepening economic slump in this deterioration coupled with the escalating size of the likely fiscal stimulus puts the deficit on course to exceed $1 trillion,” Edward McKelvey, a senior economist in New York at Goldman Sachs Group Inc., wrote in a Dec. 8 report to clients. “This implies upside risk to our $2 trillion figure for Treasury supply.”

Clinton Stymied

Clinton’s proposals to spur the economy early in his administration in 1993 were stymied by concern how bond investors would react, according to James Carville, a Clinton consultant during the 1992 presidential campaign.

“Early in the Clinton days, the hallmark of policy was if you did this, how would it affect the bond market,” Carville said in an interview last year. “Every time I would talk to someone they would say ‘you can’t do that, it will freak the bond market out.’ I said ‘goddamn, whoever the bond market is, these bastards are powerful.’”

The potential for massive deficits has done nothing to damp demand for government debt as the U.S. prepares to spend $8.5 trillion to bailout financial institutions, homeowners and the economy. The biggest deficit as a percentage of the economy was 6 percent in 1983. A trillion-dollar 2009 gap would top that.

Fed Purchases

To prevent yields from rising, Fed policy makers indicated that the central bank may buy Treasuries. Fed Chairman Ben S. Bernanke suggested in a Dec. 1 speech that he would consider such a measure, saying one option is to buy “longer-term Treasury or agency securities on the open market in substantial quantities.”

“If there is a whiff of anything getting worse, the Fed can just go downstairs and start that printing press,” said Kevin Gaynor, head of economics and interest-rate strategy at Royal Bank of Scotland Group Plc in London. “They can easily stop targeting the federal funds rate and start targeting a two- or five-year Treasury yield.”

Policy makers may also cut interest rates again, which may keep bond yields low. The Federal Open Market Committee will reduce its target rate for overnight loans between banks by a half-percentage point, to a record 0.50 percent, when it meets Dec. 15-16, according to the majority of economists surveyed by Bloomberg News.

Recession Outlook

The U.S. economy has been in a recession for a year, the National Bureau of Economic Research declared on Dec 1. The economy will continue to contract through June, with unemployment rising above 8 percent the end of 2009, from 6.7 percent last month and this year’s low of 4.8 percent in February, according to Bloomberg surveys of economists. That would make the current slump the longest since the Great Depression.

“In some ways it’s ironic,” said Meg Browne, senior currency strategist at Brown Brothers Harriman & Co. in New York. “The U.S. turned down first and the crisis appeared first in the U.S., yet people continue to flock to the U.S. government debt market because it’s the biggest and deepest market in the world and still has a low risk.”

The U.S. will eventually have to commit to balanced budgets, said Alice Rivlin, former Fed vice chairman and founding director of the Congressional Budget office.

“We can’t press our luck,” said Rivlin, now a scholar at the Brookings Institution in Washington. “Eventually, we’ve got to show the world that we are fiscally responsible.”

To contact the reporter on this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.net or Liz Capo McCormick in New York at emccormick7@bloomberg.net

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Putin Devaluation Delay Risks Industry as Exports Steal Share

By Alex Nicholson

Dec. 15 (Bloomberg) -- Russian Prime Minister Vladimir Putin’s pledge to avoid a “sharp” devaluation of the ruble and let the currency fall gradually has dissuaded citizens from storming banks to withdraw their savings as they did during the crisis of 1998.

It also has prompted Russia’s first credit-rating downgrade in nine years and may prolong the decline of the nation’s manufacturing industry. A one-time, 20 percent devaluation is needed even though the ruble has fallen 15 percent against the dollar since August and the central bank widened its trading band five times in a month, said Anton Struchenvsky, an economist at Moscow brokerage Troika Dialog.

“It’s like using a tourniquet: The blood doesn’t flow, the arm goes numb, but if you keep it tight for long the tissue will die,” Struchenvksy said. A devaluation is “the only way to let the blood, the money, back into the economy.”

After oil-fueled growth averaging more than 7 percent a year, the Russian economy may now go into reverse, according to Deputy Economy Minister Andrei Klepach, the first government official to suggest that the Russian economy is heading for recession. Industrial output shrank in November for the first time since at least 2003, according to the median forecast of 12 economists in a Bloomberg survey. The figures may be released tomorrow.

Reserve Spending

The central bank has burned through a quarter of its reserves, or $161 billion, since August to stem the ruble’s decline. International and domestic investors have pulled about $211 billion from the country, BNP Paribas SA estimates, after the price of Urals crude oil dropped 64 percent, credit markets seized up and Russia fought a five-day war with Georgia.

The budget surplus narrowed by almost 300 billion rubles ($11 billion) last month as tax collection plummeted. Energy accounts for 73 percent of Russian exports outside the Commonwealth of Independent States.

“I hope in the near future the government will weaken the ruble,” Viktor Vekselberg, a billionaire partner in oil company TNK-BP, told reporters on November 28.

Putin, 56, reiterated his pledge that there would be no “sharp” fluctuations in a televised question-and-answer session on Dec. 4, during which he sought to reassure Russians about their jobs and benefits. Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said in an interview yesterday with radio station Ekho Moskvy that Russia won’t let the ruble float freely and may continue to widen the band in which it can trade.

Rubles in Coffins

Putin and Dmitry Medvedev, the 43-year-old president he picked to replace him, are trying to avoid a rerun of the 1998 financial crisis, when the government defaulted on $40 billion of debt and devalued the ruble 70 percent. Russians hammered on the locked doors of the country’s collapsing banks as their savings were wiped out, and demonstrators carrying rubles in miniature coffins marched past the central bank headquarters.

That devaluation, in tandem with a surge in oil prices, paved the way for the economic boom of recent years as Russian manufacturers reaped the rewards of a competitive exchange rate for their exports while nudging imports from store shelves.

The economy grew 6.4 percent in 1999 and 10 percent in 2000, the year Putin came to power as president.

This time around, the global recession means customers for Russian goods inside and outside the country may be hard to find, even if prices of goods do fall.

A sharp devaluation “is not going to be enough to save the economy from a major slowdown,” said Neil Shearing, emerging markets economist at Capital Economics in London.

Unpaid Wages

If the ruble drops more, the accelerating inflation of the early 1990s may reappear and combine with rising unpaid wages and unemployment to choke spending, according to Shearing.

“The ruble-dollar rate is on every corner of Moscow,” displayed on signs outside foreign-exchange kiosks and banks, he said. “It’s seen as a bellwether for the economy. It’s going to have an impact on consumption, not just through the impact of higher prices for imports, but because it hits confidence.”

The global slump also has reduced demand for Russian metals and energy. OAO Magnitogorsk Iron & Steel, Russia’s third- largest steelmaker, said last month it was in talks with OAO Sberbank over a loan to fund operations and investment after demand for the metal slumped and customers delayed payments. The company also cut steel output to 700,000 metric tons in October from a monthly average of about 1 million tons.

“The entire global economy is depressed,” said Maxim Oreshkin, head of research at OAO at Rosbank in Moscow. The World Bank has forecast international trade will contract for the first time in 25 years in 2009.

Chocolate Fears

Russian steelmakers including Magnitogorsk, OAO Severstal and Evraz Group SA are calling for government support through measures such as imposing duties on Chinese imports. The nation’s six largest producers had aimed to invest more than $26 billion through 2012 before the crisis.

And just as inflation has started to decline from a more than six-year high of 15.1 percent in June, a weaker ruble would push up prices for imports, which Russia’s Agriculture Ministry says account for 40 percent of the food consumed in Russia.

Elena Mlotok, marketing director at Moscow-based confectioners Fruzhe, which sources most of its ingredients from Latin America and Turkey, says she dreads a ruble drop, which would force the company to raise prices on its chocolate-covered berries.

“Apart from things like cranberries, none of our ingredients grow in Russia,” said. “Unfortunately, we are very dependent on the rate.” The cost of the company’s ingredients have jumped by 10 percent in the last month, she says, and “the only way we can react is by raising our prices.”

To contact the reporter on this story: Alex Nicholson in Moscow at anicholson6@bloomberg.net.

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U.K. House Prices Will Decline 10% Next Year, Rightmove Says

By Svenja O’Donnell and Brian Swint

Dec. 15 (Bloomberg) -- U.K. house prices extended declines in December and will drop a further 10 percent next year as the recession batters the British economy, Rightmove Plc said.

The average price advertised by sellers fell 2.3 percent on the month to 217,808 pounds ($325,993), the operator of the U.K.’s biggest residential property Web site said today. Asking prices have dropped more than 10 percent from the peak in May and will fall by the same amount next year, Rightmove said.

“It’s tough out there,” Miles Shipside, commercial director at Rightmove, said in an interview on Bloomberg Television. “The market will be affected by the unemployment that’s coming. While it’s sad, we do need to reach the bottom, and that will probably happen in 2009.”

The dearth of loans is threatening to exacerbate the recession and has helped push home sales down to the lowest level since at least 1978. More than half of U.K. consumers plan to cut back on spending as they endure a squeeze on their finances, a survey by the Bank of England showed today.

On the year, asking prices have fallen 6.3 percent, while sale prices are now typically about 25 percent below the peak, the report said. Rightmove forecast in December 2007 house prices would stagnate this year.

In London, prices declined 5.1 percent on the year and rose 0.4 percent on the month. Homes in Wales have shed the most value this year, declining 13.4 percent, followed by the East Midlands, where prices dropped 12.8 percent.

Confidence ‘Low’

“There’s limited mortgage finance,” Shipside said. “Confidence is still at a low.”

Banks approved just 32,000 mortgages in October, matching the least since 1999. Real-estate agents and surveyors sold an average of 10.6 homes in the quarter through November, the least since the series began three decades ago, the Royal Institution of Chartered Surveyors said on Dec. 9.

While Britons expect credit to become less available, only 3 percent have fallen behind on payments, the central bank said today, citing a survey of more than 2,000 households conducted between Sept. 19 and Oct. 2. Nearly one in six households said they had postponed purchases on concern that they may be unable to access credit when they need it.

Only 4 percent of homeowners with a mortgage have fallen into negative equity, where the value of the loan is greater than the property. That’s a lower percentage than in 1995, the central bank said.

Investment Drop

Housing investment may fall in coming quarters, reflecting previous declines in home values, other research by the central bank showed. It said that surveys show construction companies expect prices of new homes to drop further in the next year.

Prime Minister Gordon Brown said on Dec. 12 that the government is working on the “second stage” of a rescue program for financial institutions to restore the flow of credit to the economy. Banks remain reluctant to offer loans even after tapping into a 50 billion-pound rescue to bolster their capital.

Britain’s economy contracted 0.5 percent in the third quarter, and the Bank of England predicts it will shrink next year. U.K. policy makers cut the key rate by a percentage point to 2 percent on Dec. 4, following a 1.5 percentage-point reduction the previous month.

To contact the reporters on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net; Brian Swint in London at bswint@bloomberg.net.

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Australia Cuts Commodity Sales Forecast 10% on Crisis

By Madelene Pearson

Dec. 15 (Bloomberg) -- Australia, the world’s largest shipper of coal, iron ore and wool, cut its commodity exports forecast by 10 percent because of the global financial crisis that may continue to hinder any recovery until the second half next year.

Overseas sales are estimated at A$192 billion ($127 billion) in the year ending June 30, 2009, the Canberra-based Australian Bureau of Agricultural and Resource Economics said today in an e- mailed statement. That compares with its September forecast of A$214 billion and revised sales of A$148 billion a year earlier.

Mining companies including Rio Tinto Group are cutting output as the global recession and credit crunch limit demand, driving prices down. A recovery in demand for energy and minerals commodities is expected in late 2009, bolstered by China’s 4 trillion yuan ($584 billion) stimulus package, the bureau said.

China is “going to be quite critical to any recovery,” said Gerard Burg, minerals and energy economist at National Australia Bank Ltd., who expects “modest” recovery in the second half of 2009 and into 2010. “For commodities, it’s going to be dependent on growth in the construction and manufacturing sectors and also their infrastructure construction.”

Australia’s exports of minerals and energy are forecast at A$159 billion, from about A$180 billion in September, the bureau said. That’s still 37 percent higher than a year earlier. China, the world’s biggest buyer of raw materials and Australia’s biggest customer for minerals, may grow 8 percent next year from an estimated 9.6 percent this year, it said.

Copper Drops

The Reuters/Jeffries CRB Index of 19 materials has slumped 52 percent from a July record and Rio Tinto has said the global outlook is “uncertain” in the short term. Copper is down 52 percent this year, nickel has fallen 60 percent, while zinc has lost 55 percent and oil 51 percent.

“The main adverse effect of the global financial crisis has been the sharply lower world prices for minerals and energy commodities,” Phillip Glyde, the bureau’s executive director, said in the statement.

Earnings from energy commodities are estimated at A$80.8 billion, while sales of metals and minerals are predicted to be A$78.3 billion.

The price of West Texas Intermediate crude oil may average $99 a barrel in calendar 2008, compared with an earlier estimate of $107, the bureau said. Crude reached a record $147.27 on July 11. Prices are tipped to fall further to average $59 a barrel in 2009, lower than the $98 forecast in September.

Australian Dollar

Prices for steelmaking materials iron ore and coking coal, Australia’s top two export earners, are expected to fall in the year starting April 2009, the bureau said. Earnings from iron ore, coal and liquefied natural gas account for most of the growth in energy and minerals sales forecast this fiscal year.

The price of gold may fall 7 percent to $810 an ounce in 2009, the bureau said. Bullion may average around $870 an ounce this year, it said.

To be sure, recent falls in the Australian dollar will support export earnings should they be sustained, the bureau said. The local currency has slumped 30 percent so far this fiscal year against its U.S. counterpart. The bureau cut its average Australian dollar forecast to 70 U.S. cents in 2008-2009, from a previous estimate of 85 cents.

“The change in the exchange rate has really masked some of the falls,” National Australia’s Burg said.

Earnings from farm exports are forecast at A$29.4 billion in fiscal 2009, compared with the A$30 billion September forecast and 7 percent higher than a year earlier.

To contact the reporter on this story: Madelene Pearson in Melbourne on mpearson1@bloomberg.net

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Japan’s Tankan Confidence Plunges Most in 34 Years

By Jason Clenfield

Dec. 15 (Bloomberg) -- Sentiment among Japan’s largest manufacturers fell the most in 34 years, signaling companies are likely to cancel spending plans and cut more jobs, pushing the economy further into recession.

An index that measures confidence among large makers of cars and electronics dropped to minus 24 from minus 3, the Bank of Japan’s quarterly Tankan survey showed today. A negative number means pessimists outnumber optimists.

The yen’s surge to a 13-year high last week has compounded woes for Japanese manufacturers who are already reeling from a collapse in export markets. Job cuts by companies including Sony Corp. and Toyota Motor Corp. have brought the recession home to households and increased the risk of a prolonged slump.

“The overseas situation is worsening so quickly and so dramatically; it’s really getting dangerous,” said Tomoko Fujii, head of economics and strategy at Bank of America Corp. in Tokyo. “The next few months are going to be a very severe period.”

The drop in confidence, which was in line with economists’ expectations, didn’t dissuade investors from buying stocks on speculation U.S. authorities will help General Motors Corp. and Chrysler LLC avoid bankruptcy. The Nikkei 225 Stock Average climbed 4.7 percent in morning trading in Tokyo. The gauge is down 44 percent this year.

Bank of Japan Governor Masaaki Shirakawa and his colleagues will discuss the Tankan result at a policy meeting ending Dec. 19. The board will probably keep its benchmark interest rate at 0.3 percent at the gathering, according to all 11 economists surveyed by Bloomberg News.

Rate Cut ‘Option’

The bank lowered the rate for the first time in seven years in October, and another cut at some point “is an option,” former Deputy Governor Toshiro Muto said in an interview on Dec. 11. Still, he added, “with the interest rate already so low, a further reduction would have only a limited impact.”

The 21-point decline in the large-manufacturer index was the biggest since February 1975. In the current survey’s 34-year history, only a 26-point drop during the first oil shock in August 1974 was larger.

Sentiment among large non-manufacturers fell to minus 9 from 1, entering negative territory for the first time in five years, the central bank said. Large companies said they plan to cut spending 0.2 percent in the year ending March.

“The global financial crisis has caused serious damage to exporters but the repercussion effects are spreading,” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo.

Gloomy Automakers

Sentiment among automakers plunged to minus 41 from 5, the steepest drop ever. Japanese carmakers have been hardest hit by the recession in the U.S., where consumer credit is drying up and household confidence is close to a record low.

Toyota, which forecasts profit will fall 74 percent this fiscal year, last month said it will halve its temporary work force to 3,000 employees. The company is considering production and investment cuts in India, Brazil, China and the U.S.

The yen’s 17 percent gain against the dollar since September has lowered the value of overseas sales and undermined the competitiveness of Japanese cars, cameras and televisions.

Japan’s currency traded at 90.95 per dollar from 90.68 before the Tankan was published and 88.53 on Dec. 12, the strongest since August 1995. Large manufacturers expect the yen to trade at 103.32 in the year ending March, the survey showed.

The world’s second-largest economy shrank in each of the past two quarters, entering the first recession since 2001. Companies will keep trimming production and payrolls in coming months, prolonging the downturn, said Bank of America’s Fujii.

Too Many Workers

“The recession is likely to persist through the first half of next year,” Fujii said. “We have tighter lending conditions, excess capacity, excess labor -- these all point to downside risks in the pipeline.”

The capacity index for large manufacturers climbed to 11 points from 2, the highest since March 2004. A measure of labor demand rose to a four-year high of 8 from minus 2, the first time companies said they had too many workers since 2005.

Sony last week said it would fire 16,000 employees worldwide, including 8,000 full-time staff. Canon Inc., Sharp Corp. and Nissan Motor Co. eliminated temporary and part-time positions over the past month, pushing consumer sentiment to a record low and stoking anxiety among voters.

Prime Minister Taro Aso, facing tumbling approval ratings, last week announced his second economic stimulus package since becoming leader in September. Aso still hasn’t submitted a bill to parliament to fund measures announced in October.

LDP Rift

The ruling Liberal Democratic Party may split apart before elections required by September 2009 because lawmakers don’t believe victory is possible under Aso, independent lower-house member Kenji Eda said last week.

Big companies expect business to get worse in coming months. Large manufacturers see their index falling to minus 36 in the next survey in April, and service companies expect a drop to minus 14 points.

Some economists downplayed the result.

“These forward-looking indicators have a rather poor track record when it comes to predictions,” said Jan Lambregts, head of Asian research at Rabobank International in Hong Kong. “It could have been a whole lot worse.”

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

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BOJ May Trim Rates, Former Deputy Governor Muto Says

By Mayumi Otsuma and Mariko Yasu

Dec. 15 (Bloomberg) -- The Bank of Japan may cut the benchmark interest rate further to show its commitment to countering a deepening recession and market turmoil, said Toshiro Muto, a former central bank deputy governor.

“A central bank has a role of influencing financial market sentiment and a rate cut is an option to show their determination” to support the economy, Muto, 65, said in an interview on Dec. 11. Still, “with the interest rate already so low, a further reduction would have only a limited impact.”

The central bank's Tankan survey today showed confidence among large manufacturers fell the most in 34 years as a deepening global financial crisis crimped export demand, forcing companies to pare production and fire workers. The Bank of Japan trimmed the key overnight lending rate to 0.3 percent from 0.5 percent in October, its first cut in seven years.

Muto served as the central bank's deputy chief for five years through March following his 37-year career at the Ministry of Finance. He was the government's first choice for the central bank chief, only to be rejected by the opposition-controlled upper house, which said his stint at the Finance Ministry may hamper the bank's independence.

Muto, who is now head of Daiwa Research Institute, said that lowering borrowing costs too much could damage the function of financial markets, echoing the views of Governor Masaaki Shirakawa. Since the October rate cut, Shirakawa has said at least eight times that further reductions may impede the flow of funds in the money market by diminishing returns and discouraging trading.

'Snuffed Out'

“As long as interest rates stay even slightly positive, the market mechanism can survive, but that functionality could get snuffed out” if rates are cut to zero, said Muto. “We've learned that that the significance of that from our zero-rate policy.”

Muto said should the turmoil intensify, the bank may revive quantitative easing, a policy of providing more funds to the banking system while holding the key rate close to zero. The bank adopted measure for five years through March 2006.

For now, policy makers should focus on measures to provide sufficient liquidity to lenders to avert a credit crunch, Muto said. Buying commercial paper directly from companies could cause “side effects,” he said. He added the bank doesn't need to increase its monthly purchase of government bonds from lenders from the current 1.2 trillion yen ($13.3 billion).

'Fully Possible'

It's “fully possible” that Japan may intervene in the currency market should it determine the yen's “overshooting” is a threat to the economy, Muto said. Investors are now buying the yen as a “safe-haven asset” because of the relatively better shape of the Japanese economy, he said.

Japan's currency surged to a 13-year high against the dollar last week.

“However, it's hardly conceivable that Japan's economy will improve independently from the rest of the world, and it's fully possible that the yen will weaken should financial market turmoil subsides,” Muto said.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

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Dollar Staggers as U.S. Unleashes Cash Flood, Deficit

By Bo Nielsen and Daniel Kruger

Dec. 15 (Bloomberg) -- The biggest foreign-exchange strategists and investors say the best may be over for the dollar after a four-month, 24 percent rally.

The currency weakened 5.9 percent measured by the trade- weighted Dollar Index after strengthening between July and November as investors bought the greenback to flee riskier assets and repay dollar-denominated loans from lenders reining in credit. Ever since peaking on Nov. 21, the dollar fell against all 16 of the most-widely traded currencies, according to data compiled by Bloomberg.

U.S. policy makers are flooding the world with an extra $8.5 trillion through 23 different plans designed to bail out the financial system and pump up the economy. The decline shows that the increased supply of money may be overwhelming investors just as the government steps up debt sales, the trade and budget deficits grow and de-leveraging by investors slows.

“The dollar will go to new lows as the U.S. attacks its currency,” said John Taylor, chairman of New York-based FX Concepts Inc., which manages about $14.5 billion of currencies.

Citigroup Inc., Goldman Sachs Group Inc., BNP Paribas SA and Bank of America Corp. predict further weakness. Last week was the first time in almost a month that consensus estimates for the dollar against the euro through 2009 fell, according to the median forecast of 47 strategists surveyed by Bloomberg.

Taylor, whose firm manages the biggest hedge fund focusing on foreign exchange, said while the dollar may strengthen next year, it will fall to a record low against the euro in 2010 and to a 13-year low of 80 per yen as soon as 2009.

The dollar fell to 90.88 yen as of 12 p.m. in Tokyo from 91.21 late in New York on Dec. 12. It declined to $1.3455 per euro from $1.3369.

‘Turning Point’

Speculation that the dollar has peaked gained steam last week as the currency plunged 4.9 percent against the euro to $1.3369, its biggest drop since Europe’s common currency was created in 1999. It weakened 1.75 percent versus the yen.

“We’re at a turning point in terms of dollar dynamics,” said Jens Nordvig, a New York-based strategist at Goldman Sachs, the biggest U.S. securities firm to convert to a bank. “The dollar shortage has been addressed and we’ll see people start to focus on other things and those are all dollar negative.”

After rising from $250 billion in September and October, dollar cash positions at U.S.-based banks have stayed at about $800 billion since Nov. 1, according to Nordvig.

A survey last month by New York-based Sanford C. Bernstein & Co. found that 63 percent of hedge-fund managers said they are about half done selling securities to reduce their use of borrowed money after financial companies cut back on credit following almost $1 trillion in writedowns and losses since the start of 2007. Twenty-three percent said they were three-quarters finished.

Yen Example

Goldman Sachs says the dollar may weaken to $1.45 per euro by the end of next year. Up until Dec. 11, the firm forecast that it would end 2009 at $1.30. The median estimate in a Bloomberg survey is for the currency to finish next year at $1.25.

Dollar bulls say it’s a mistake to bet against the currency now because Treasury yields are falling to record lows even as the government prepares to sell more than $1 trillion of debt, a sign there’s no end in sight to demand for the safest U.S. assets. They also say the yen, which typically rallies as risky assets decline, is appreciating.

“The yen’s strength falls into our theory that the risk- aversion trade is not off the table,” said Peter Rosenstreich, chief market analyst at Geneva-based currency trading firm ACM Advanced Currency Markets. “The fact that the yen continues to gain strength validates our theory in the longer term, the dollar safe-haven trade is not done yet.”

‘Bad News’

Robert Sinche, the head of global currency strategy at Bank of America in New York, the third-largest U.S. bank, says the dollar is bound to weaken because investors are starting to focus on traditional measures of value such as relative interest rates, budget deficits and trade balances.

As more loans are repaid, there is less need for dollars, forcing investors to value the currency on metrics such as relative interest rates, budget deficits and trade balances. By those measures, the greenback should weaken, according to Sinche.

“A lot of the reasons why the dollar went up are not sustainable and have started to disappear,” said Sinche, who predicts the currency will weaken to $1.44 per euro as early as March 31. “Bad news about the U.S. economy is beginning to be bad news for the dollar.”

Lower Rates

The Federal Reserve will cut its target rate for overnight loans between banks in half to 0.5 percent on Dec. 16, the lowest level since 1958, according to the median estimate of 84 economists in a Bloomberg survey. The European Central Bank’s target rate, currently 2.5 percent, will bottom in 2009 at 1.75 percent, according to a Bloomberg survey of economists, making the euro relatively more attractive.

Treasuries due in two years yield 1.49 percentage points less than German bunds of similar maturity, near the most since mid-October. Three-month bill rates fell below zero last week for the first time. Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., which oversees the world’s largest bond fund, said “Treasuries have some bubble characteristics.”

“The government and the Fed cannot continue to talk about trillions of dollars of financing and expansion of the Fed’s balance sheet without the dollar going south,” Gross said in a Dec. 10 interview with Bloomberg Television

Budget Deficit

Spending to shore up the financial system caused the U.S. government’s budget deficit for the first two months of fiscal 2009 that started in October to balloon to $401.6 billion, the Treasury Department said Dec. 10.

“It’s absolutely going to get worse before it gets better,” said Michael Englund, chief economist at Action Economics LLC in Boulder, Colorado. “We’re looking at a $1 trillion deficit, and that’s before the next stimulus package. If Treasury spends all of TARP, it could be $1.2 trillion to $1.3 trillion.”

The $700 billion Troubled Assets Relief Program is one of the programs set up by the government and the Fed to try to bring the economy out of the worst recession since World War II. President-elect Barack Obama also plans a stimulus package that House Speaker Nancy Pelosi said may total $500 billion to $600 billion.

The dollar’s rally may have hurt the trade balance, and earnings of companies that depend on sales overseas. U.S. exports slid to a seven-month low in October, causing the trade deficit to swell to $57.2 billion, the Commerce Department said Dec. 11. American exports dropped 2.2 percent to $151.7 billion as foreign purchases of U.S. aircraft, automobiles, chemicals and food waned. The trade gap was projected to be $53.5 billion.

Shrinking Economy

The U.S. economy may contract 3.9 percent this quarter and 2 percent in the first three months of 2009, according to the median estimate in a Bloomberg poll.

“Rapid deterioration in the U.S. economy, coupled with the adverse effects of monetary and fiscal stimuli, do not bode well for the dollar,” Citigroup strategists Todd Elmer, Michael Hart, James McCormick and Aerin Williams wrote in a report from New York on Dec. 12. The New York-based bank “foresees short-term dollar weakness, against both Group of 10 and emerging-market currencies,” they wrote.

The Citigroup strategists predicted on Nov. 6 that the euro, which was trading at $1.2715, would rally toward $1.33.

Paris-based BNP Paribas, Europe’s third-largest bank, recommends buying the euro versus the dollar amid signs that equity markets may be stabilizing. The MSCI World Index is up 16.6 percent since falling to a 5 1/2-year low on Nov. 21, the same day the Dollar Index peaked.

‘Positive Euro Bias

“With equity markets broadly stable with a positive bias and volatility easing, we expect the euro-versus-dollar declines to be capped at the $1.28” level, a team of strategists headed by Hans-Guenter Redeker in London wrote in a report Dec. 10.

Like Goldman Sachs, London-based Barclays Plc, the U.K.’s third-biggest bank, forecasts the dollar will weaken to $1.45 per euro by the end of 2009, according to data compiled by Bloomberg. New York-based Morgan Stanley strategists Stephen Jen and Spyros Andreopoulos, who in August advised clients to buy the dollar, said in a Dec. 11 report that the currency may strengthen in the first half of 2009, before “underperforming most other currencies” as the global economy recovers.

“We’re seeing that correlation between equities and the dollar break down,” said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG, the world’s biggest currency trader, according to a 2008 Euromoney Institutional Investor Plc survey. “The fact that the dollar is weakening in this environment probably tells you a bit more focus is coming back on the fundamentals of the U.S. economy.”

To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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China Industrial-Output Growth Is Weakest Since 1999

By Kevin Hamlin and Li Yanping

Dec. 15 (Bloomberg) -- China’s industrial production grew at the weakest pace in almost a decade as export growth collapsed, increasing pressure on the government to do more to revive a slumping economy.

Production rose 5.4 percent in November from a year earlier, the statistics bureau said today. None of 14 economists surveyed by Bloomberg News predicted such a small increase. Output grew 8.2 percent in October.

The central bank may add to last month’s steepest interest- rate cut in 11 years to boost domestic consumption as export demand fades because of recessions in the U.S., Europe and Japan. Goldman Sachs Group Inc. last week cut its forecast for the expansion of the world’s fourth-biggest economy next year to 6 percent from 7.5 percent.

“You have weak demand everywhere,” said Wang Qian, an economist with JPMorgan Chase & Co. in Hong Kong. “There will probably be another aggressive rate cut before the end of the year.”

Output grew the least since Bloomberg data began in 1999. The yuan traded at 6.8473 against the dollar as of 10:15 a.m. in Shanghai, from 6.8458 before the announcement.

The central bank has reduced the key one-year lending rate to 5.58 percent from 7.47 percent in September and dropped quotas limiting lending by banks. Wang expects up to 54 basis points of reductions before year’s end.

Electricity output fell by 9.6 percent from a year earlier. Pig-iron production fell 16.2 percent. Raw steel declined 12.4 percent. Steel products tumbled 11 percent.

Maanshan Iron, Chalco

Maanshan Iron & Steel Co. has cut output because of tumbling demand from builders and automakers. China’s steel exports may fall next year even after the government revoked some export taxes, according to the China Iron and Steel Association.

China’s aluminum prices have tumbled 41 percent this year as slowing economic growth curbs demand, forcing Aluminum Corp. of China Ltd., also known as Chalco, to reduce production. Chinese smelters will probably post losses next year, UBS AG said Dec. 9.

President Hu Jintao visited Angang Steel Co. during a three-day visit to Liaoning Province, a center for heavy industry, the state-run Xinhua News Agency reported Dec. 14. He pledged efforts to maintain stable growth in the face of “serious challenges and difficulties from home and abroad.”

Vehicle production fell 15.9 percent and car output declined 10.1 percent.

‘Awful’ Number

“The number is quite awful,” said Kevin Lai, an economist with the Daiwa Institute of Research in Hong Kong. “Enterprises continue to run down inventories and inevitably will reduce production quite massively.”

Lai predicts two 54 basis points interest-rate cuts before the end of the year and for the portion of deposits banks must hold as reserves to fall by 4 percentage points by the middle of next year. Currently, the reserve requirement is 16 percent for the biggest banks and 14 percent for smaller banks.

China aims to boost money supply by 17 percent in 2009 and encourage lending to boost consumption and buoy growth, the State Council said Dec. 13.

The nation’s economic slowdown is deepening, with overcapacity in almost all industries, and won’t bottom out until after the first quarter of next year, two senior officials, Liu He and Li Yizhong, said Dec. 12.

Global Growth

At stake is the 60 percent share of global growth Merrill Lynch forecasts China will contribute next year if its economy expands 8.6 percent.

Exports fell last month for the first time in seven years. Uniden Corp., a Japanese maker of wireless communication gear including cordless phones, said Dec. 11 that it will eliminate 6,200 jobs in China after demand for its products fell in North America.

The government warned Dec. 10 of “increasing downward pressure on the economy” and pledged to boost spending, cut taxes and do more to create jobs to maintain social stability. The State Council last month announced a 4 trillion yuan ($584 billion) spending package to sustain growth through 2010.

“If China’s stimulus spending is implemented correctly, it will create enough growth momentum to offset the macro impact of the global slowdown,” Yu Yongding, a former adviser to the central bank, said Dec. 10. “There should be no problem for the Chinese economy to maintain growth as high as 8 percent next year.”

To contact the reporters on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net; Li Yanping in Beijing at yli16@bloomberg.net.

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Oil Rises as U.S. May Bail Out Automakers, OPEC May Cut Output

By Gavin Evans and Christian Schmollinger

Dec. 15 (Bloomberg) -- Crude oil rose in New York on speculation the Bush administration will rescue U.S. automakers and OPEC may make the biggest supply cut in a decade.

U.S. President George W. Bush may consider using funds for rescuing Wall Street banks to aid automakers. The Organization of Petroleum Exporting Countries, which pumps 42 percent of the world’s oil, will lower output targets by 7.3 percent at a Dec. 17 meeting, according to a Bloomberg survey.

“Oil futures are reacting to some of those government efforts and the expectations that the U.S. will bail out the automakers,” said Victor Shum, a senior principal at consultants Purvin & Gertz Inc. in Singapore. “OPEC is also building sufficient expectations that they will do something drastic so prices are also creeping up because of that.”

Crude oil for January delivery rose as much as $1.21, or 2.6 percent, to $47.49 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $47.44 at 10:28 a.m. in Singapore.

Carmaking “is a fairly key sector for the U.S. economy,” said Toby Hassall, research analyst with Commodity Warrants Australia Pty in Sydney. “I do expect a rescue package in some form to go through quite soon.”

Production, Confidence

The White House said it would consider using its $700 billion bank bailout fund to help General Motors Corp. and Chrysler LLC following the Senate’s rejection of an aid package.

A report today will probably show industrial production in the U.S., the world’s largest oil consumer, contracted 0.9 percent last month as automakers cut output, according to a survey of economists. Sentiment among the largest manufacturers in Japan, the third-largest oil user, fell the most in 34 years according to the nation’s quarterly Tankan survey today.

“The whole macro picture is key,” Commodity Warrants’ Hassall said.

China aims to increase its money supply 17 percent in 2009 and encourage lending to boost domestic consumption and buoy growth in the world’s fourth-largest economy.

Brent oil for January settlement rose as much as 84 cents, or 1.8 percent, to $47.25 a barrel on London’s ICE Futures Europe exchange. The contract expires tomorrow. The more actively traded February futures rose 1.7 percent to $49.92 at 10:29 a.m. Singapore time.

OPEC Output

New York futures are down 68 percent from a record of $147.27 a barrel and touched a four-year low of $40.50 Dec. 5.

Oil prices will fall further if OPEC nations don’t cut daily output by at least 1.5 million barrels at this week’s meeting, Iranian Oil Minister Gholamhossein Nozari said yesterday.

“There is fairly strong support” for oil around current levels, Commodity Warrants’ Hassall said. “OPEC is going to make a supply-side response quite soon” while government stimulus packages will also start being felt, he said.

The global slump may reduce daily oil use to 85.8 million barrels in 2008, the first decline since 1983, the International Energy Agency said Dec. 11. A forecast 0.5 percent increase in fuel use next year may be wiped out if the recession deepens, the Paris-based agency said.

Hedge-fund managers and other large speculators increased their net-long positions in New York crude-oil futures in the week ended Dec. 9, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 10,807 contracts on the New York Mercantile Exchange, the Washington-based commission said in its Commitments of Traders report. Net-long positions rose by 8,558 contracts, or 381 percent, from a week earlier.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net; Gavin Evans in Wellington at gavinevans@bloomberg.net

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Get Ready for ‘Toyota Shock’ With Dollar’s Slump: William Pesek

Commentary by William Pesek

Dec. 15 (Bloomberg) -- First came the “Sony Shock.”

No, not news last week that the consumer-electronics giant is cutting 16,000 jobs -- the other shock. For investors, the big one came in April 2003, when shares fell 27 percent in two days.

Sony Corp.’s woes may pale in comparison with the still developing ones at Toyota Motor Corp. A “Toyota Shock” may be on the way as the dollar trades around 90 yen and questions abound about a U.S. bailout for Detroit automakers.

The difference this time is that the tough 2009 facing Toyota will be shared by Japan’s $4.4 trillion economy. It’s anything but pretty.

Those who argue Japan is better positioned than peers to weather the global crisis have a point. Japan’s roughly $15 trillion of household savings offers a cushion the U.S., Europe and China lack. Japan also has demonstrated a remarkable ability to live without much growth.

Yet the yen’s powerful rally is knocking down one of the three pillars supporting the country, the others being ultra-low interest rates and super-loose fiscal policy. Its gains fly in the face of conditions in an economy that shrank at an annual 1.8 percent pace in the three months ended Sept. 30. That’s where the world’s second-biggest economy finds itself.

Rising and Falling

It’s often said that Japan is a nation of first-rate companies and third-rate politicians. The trouble is, corporate Japan is more reliant on weak exchange rates than the government admits. Germany’s manufacturers often thrive regardless of the euro’s value; Japan’s often rise and fall with the yen.

The problem for companies such as Toyota, Sony and Canon Inc. runs deeper. They are facing the additional obstacle of sinking confidence. Consumers are now the most pessimistic in at least 26 years. Japan’s confidence index dropped to 28.4 last month from 29.4 in October.

Prime Minister Taro Aso’s popularity is declining as fast as the Nikkei 225 Stock Average. His support rate dropped by almost half to 20.9 percent in a Yomiuri newspaper poll published last week, from 40.5 percent a month ago.

Aso’s falling fortunes are getting round-the-clock news coverage, reminding voters the nation is becoming rudderless at the worst time possible. It’s remarkable how quickly Japan has gone from believing it was immune from the U.S.’s woes to staving off a domestic crisis of its own.

‘Falling Apart’

“We need to implement policies to prevent the economy from falling apart,” Economic and Fiscal Policy Minister Kaoru Yosano told reporters on Dec. 9. “It’s going to be a tough year for the economy next year.”

It will get even tougher as the yen bears the brunt of investors’ fleeing risky assets. It is already at a 13-year high against the dollar. While governments in Jakarta and Seoul grapple with plunging currencies, Japanese policy makers are at a loss over how to stop the yen from approaching its postwar high of about 79 to the dollar.

What can Japan really do here? The Bank of Japan is far more likely to cut its benchmark interest rate to zero from 0.3 percent than raise it. The Finance Ministry can sell yen, yet the risk of failure may be too great. If Japan intervened and markets shrugged, the yen’s surge could accelerate.

That’s when newspaper headlines will be dominated by phrases such as “Deflation Is Back” and “Recession Deepens,” further hurting confidence at home. Abroad, a key market for Japanese cars and electronics is in even greater disarray following the U.S. Senate’s rejection of a $14 billion rescue for automakers.

U.S. Disarray

Even if the Bush administration moves to tap a bank-bailout fund to help automakers, it’s not clear Detroit would get as much money as it needs to avoid massive job losses.

If not for the millions of U.S. jobs hanging in the balance, the potential demise of General Motors Corp. or Chrysler LLC might suit Toyota, Honda Motor Co. and Nissan Motor Co. just fine. Not so when the nation in which they traditionally earn more than half of their operating profit is sliding.

The U.S.’s problems are taking their toll Asia-wide. The MSCI Asia Pacific Index lost 3.7 percent on Dec. 12. Australia unveiled plans to spend an extra A$4.7 billion ($3.2 billion) on infrastructure to prevent a recession. And economists say China’s economic slowdown is worsening.

Governments were depending on China to pick up the slack as the U.S. edged toward recession. Japan thought Chinese demand would be a stabilizing force in the world’s fastest-growing economic region. We can forget that.

The question is what will happen if the yen continues to strengthen, which is likely. The yen seems to win demand either way, whether it’s from investors fleeing risky assets, or the falling dollar. A move toward 85 yen can’t be ruled out.

That isn’t good news for Toyota or the rest of corporate Japan. Investors may have to get used to being shocked.

(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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Australia Aims to Cut Carbon Emissions 5-15% by 2020

By Gemma Daley and Angela Macdonald-Smith

Dec. 15 (Bloomberg) -- Australia will aim to reduce carbon emissions by between five and 15 percent from 2000 levels by 2020 to tackle global warming and protect its A$1 trillion ($662 billion) economy, Climate Change Minister Penny Wong said.

The reduction would help Australia meet its goal of cutting emissions 60 percent by 2050, Wong said. The plan would trim economic growth by 0.1 percentage point a year between 2010 and 2050, assuming an initial price of A$25 a metric ton of carbon when emissions trading starts in 2010.

“These targets are hard for Australia,” Wong told reporters in Canberra. The objectives are “underpinned by the most comprehensive and robust emissions trading system anywhere in the world.”

The 5-15 percent reduction compares with a European Union target to cut greenhouse gases by a fifth in 2020 from 1990 levels. The U.S., Canada and Japan, at United Nations-led climate talks last week in Poznan, Poland, rebuffed demands by developing countries for pledges to cut greenhouse gas emissions.

The government will provide A$3.9 billion of free permits to coal-fired power generators over five years starting 2010 to compensate them for the added expense of introducing a cost on carbon. That assistance will be reviewed after five years.

LNG, Smelters

It will also provide permits to emissions-intensive trade- exposed industry at two rates. Activities including aluminum smelting, iron and steel manufacturing are likely to get 90 percent of their permits free. Liquefied natural gas producers and petroleum and alumina refiners will probably be among those gaining 60 percent of their permits free.

The government will release a guide on eligibility for the two rates at the start of 2009.

Prime Minister Kevin Rudd, 51, ratified the Kyoto Protocol on his first day in office in November last year. The G-8 countries on July 8 pledged to reduce output of heat-trapping pollution by at least 50 percent by 2050.

“To delay any further would be reckless for our economy and our environment,” Rudd told the National Press Club in Canberra after the white paper was release. A climate-change protester was removed from the room after she heckled Rudd.

2009 Climate Deal

One hundred and eight-nine nations agreed on Dec. 13 to negotiate a climate deal through 2009, overseen by the United Nations. World carbon dioxide emissions from energy use rose 2.8 percent last year as coal consumption outpaced crude oil and cleaner-burning natural gas, BP Plc said.

Australia’s emissions from fuel combustion rose 31 percent in the decade through 2000 and jumped 45 percent in the 15 years through 2005, International Energy Agency data show.

The nation’s annual economic growth rate will be little affected in the 40 years following the start of an emissions trading system, the Treasury Department said in October.

Gross domestic product per capita will grow at an average annual rate of 1.2 percent to 1.3 percent between 2010 and 2050 as Australia moves to reduce greenhouse gas emissions, it said. By comparison, growth will be 1.4 percent if no action is taken.

Australia’s proposed cap-and-trade system is similar to that used in the European Union.

Companies may leave Australia because of increased costs under the carbon plan, the nation’s Business Council said on Aug. 21. BHP Billiton Ltd. Chairman Don Argus in September urged the government to rethink the cap-and-trade system and consider a carbon tax instead.

The plan includes A$11.5 billion in assistance for families and businesses in 2010-11. That will help households, especially pensioners and those on low incomes, cope with the system.

To contact the reporters on this story: Gemma Daley in Canberra at gdaley@bloomberg.netAngela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net

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