Business and Finance

Japan’s housing starts fell to the lowest level since the nation celebrated its postwar recovery by hosting the Olympics in 1964, as builders were hobbled by dwindling household incomes and sustained deflation.

Construction companies broke ground on 788,410 homes last year, 27.9 percent fewer than in 2008, the Land Ministry said today in Tokyo. That was the lowest since 751,429 recorded in 1964. The pace of decrease eased in the past four months.

The report highlights a decline that’s likely to see Japan lose its place as the world’s second-largest economy to China this year. Government programs to stimulate the property market have been unable to reverse expectations that home prices will fall, keeping households away from investing in real estate.

“It’s been a very miserable year,” Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo, said before the report was published. “There certainly is an improvement underway, but it’s been slow to materialize, and it’s starting from very low levels.”

Falling wages and mounting job losses sapped demand for new homes last year, sending apartment builder Anabuki Construction Inc. into bankruptcy in November.

Housing starts fell 15.7 percent in December from a year earlier, the slowest pace in a year, today’s report showed.

Other figures today signaled that the economy continues to recover from its worst postwar recession.

Deflation Continues

Industrial production rose for a 10th month in December, households increased spending and the unemployment rate fell to 5.1 percent. At the same time, consumer prices slid for a 10th month and minutes of Bank of Japan meetings showed officials were concerned that deflation and a rising yen would hamper the recovery.

Japan has been blighted by price declines and sluggish economic growth since an asset bubble burst two decades ago. An index of residential land prices has slid more than 40 percent from its 1991 peak, Japan Real Estate Institute data show.

Respondents in a Bank of Japan survey released this month said they expect property values to slump for a seventh quarter. The central bank’s index of household expectations for future land prices dropped, reversing two quarters of improvements.

The average price of condominiums fell 5 percent last year in the metropolitan area of Tokyo, Kanagawa, Saitama and Chiba, according to the Real Estate Economic Institute. Nationwide residential land prices slid 3.2 percent in 2009 after rising for the previous two years, Land Ministry data show.

Sharing Rooms

“More people are asking for discounts, or are looking to share rooms with others,” said Wataru Ichinari, president of Tokyo-based Ichinari Real Estate. “We’re not going to see a full-fledged recovery in the housing market” for at least a couple of years, he said.

Policy makers are trying to revive the market. Former Prime Minister Taro Aso’s administration expanded and extended tax deductions on housing loans. The current government under Yukio Hatoyama included incentives to build and renovate energy-efficient homes in a 7.2 trillion yen ($80 billion) stimulus package passed by parliament yesterday.

The housing recession is depleting business at the country’s construction firms. Anabuki Construction filed for bankruptcy with 140 billion yen in debt, becoming the country’s sixth-largest corporate failure last year, according to Tokyo Shoko Research Ltd. Profits in Anabuki’s condominium business plunged following the global financial crisis, the company said in a statement on its Web site.

Construction Bankruptcies

Bankruptcies in the construction industry last year accounted for more than a quarter of 15,480 failures, the highest among all industries, according to Tokyo Shoko.

Even as the employment market starts to improve, the jobless rate has been above 5 percent since last April and wages have slumped for 16 straight months. Employee compensation will slide a record 3.9 percent in the fiscal year ending March 31, and a further 0.7 percent in the following 12 months, the government said last week.

The job environment will further dissuade potential home buyers, said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co. in Tokyo. “With unemployment so high and wages dwindling, households just aren’t going to be in the mood to buy a new home.”

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Takuji Okubo, former senior director at Merrill Lynch Japan Securities Co. in Tokyo, has joined Societe Generale SA as its chief Japan economist.

Okubo starts work today for the Paris-based bank in the newly created position, Glenn Maguire, chief Asia-Pacific economist at Societe Generale in Hong Kong, wrote in an e-mail to Bloomberg News.

Okubo was employed at Merrill Lynch from 2007 to 2009 after working for Goldman Sachs Group Inc. in Tokyo.

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Morgan Stanley Asia Ltd. Chairman Stephen Roach said U.S. policy makers should start to exit emergency stimulus measures now if the economic recovery is as strong as they say it is.

“There is never an easy time to do it,” Roach said on Bloomberg Television today. “The longer they wait, the greater the chance they sow the seeds for the next bubble. So I’m in favor of an early exit strategy.”

The Federal Reserve on Dec. 16 pledged to keep interest rates “exceptionally low” for an “extended period” even as officials said financial markets were healthy enough to allow most emergency lending programs to expire at the end of this month. Chairman Ben S. Bernanke and his fellow policy makers cut the benchmark rate almost to zero in December 2008.

“We’ve seen the most extraordinary monetary stimulus on the record in the 15, 16 months post-Lehman Brothers,” Roach said. “We’ll have to see the most extraordinary withdrawal of stimulus on record” and “if this recovery is as strong as Bernanke and markets think it is, the time to exit is now.”

Data since the Nov. 3-4 Fed meeting showed that “economic activity has continued to pick up and that the deterioration in the labor market is abating,” the Open Market Committee said in a Dec. 16 statement. “Financial market conditions have become more supportive of economic growth,” while the economy is “likely to remain weak for a time,” policy makers said free business cards.

Roach, in a separate interview on WBBR radio, also disagreed with Bernanke’s argument put forward on Jan. 3 that low central bank interest rates didn’t cause the housing bubble of the past decade.

‘Ludicrous’ Claim

“I think it’s ludicrous to think that monetary policy didn’t play any role in causing the so-called subprime crisis,” Roach said. “Bernanke is really digging in his heels here, this is a point of view that he developed as an academic when he was at Princeton.”

Roach argued during the boom that central banks should prevent asset prices from rising too far, in contrast with Fed officials including former Chairman Alan Greenspan.

Bernanke “embraced Greenspan’s philosophy in the same fashion, arguing that monetary policy should not be used to address asset bubbles, this is more of a regulatory oversight issue,” Roach said. “The regulatory oversight function failed hugely in the last seven or eight years but I would argue so did monetary policy.”

“I think we need to take a very careful look at monetary policy and central bankers who do not believe that interest rates played a role in this crisis,” he said. “I think that view is dead wrong.”

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Mahindra-Satyam shares fell to a 4-month low on Thursday, before recovering, on concerns over its outlook after Indian investigators filed new charges over accounting fraud that hit Satyam earlier this year.

“Investors are playing a blind game until the audited numbers are out. There could be more skeletons hidden in the closet,” said HDFC Securities’ head of private client group V.K. Sharma, who is advising clients to stay away from the stock until there is further clarity.

The stock topped the volume chart, with about 30 million shares traded, nearly three times its average daily volume over the past 90 days. It ended up 2.4 percent at 92.75 rupees.

Mahindra Satyam, earlier known as Satyam Computer Services, was acquired by Tech Mahindra in April after the company was hammered by India’s biggest corporate fraud, which came to light in January.

V. V. Lakshmi Narayana, deputy inspector general of India’s Central Bureau of Investigation, told Reuters the extent of the fraud at Satyam could be much larger than the 71.36 billion rupees ($1.5 billion) that founder Ramalinga Raju had confessed to in a letter in January.

“All investigations into the accounting and auditing part of the business have been completed, and we are now going to look into the money diversion from the company,” Narayana, who is part of the team probing the fraud, said from Hyderabad.

“Whatever Raju said is not the complete reality.”

Narayana said the agency estimated losses suffered by investors in the wake of the fraud could be up to 140 billion rupees.

Mahindra Satyam, which has about 35,000 employees, hoped to restate its accounts by the middle of next year, Atul Kunwar, president of its global operations, said on Wednesday.

Vaibhav Sanghavi, director of Ambit Capital, said, “It’s very difficult to assess the situation until the audited numbers are out.”

Officials at Mahindra Satyam did not respond to requests by Reuters for comment. A Tech Mahindra spokesman declined comment.

Shares in Tech Mahindra, a unit of tractor and utility vehicles maker Mahindra & Mahindra, ended down 1.2 percent, having earlier fallen as much as 6.5 percent to a 3-month low.

Kunwar also told the Reuters India Investment Summit on Wednesday that customer attrition had stopped and the company did not need price cuts to win new deals.

On Tuesday, the CBI said it had filed a supplementary charge sheet containing new allegations against Raju and nine others associated with the outsourcing firm.

New charges included that revenues had been inflated by 4.3 billion rupees by creating fake invoices and customers, and that forged board resolutions were used to get loans worth 12.2 billion rupees. 

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Investors will brace for a spate of economic reports this week with their fingers crossed that there is more good news than bad since that will set the tone for the remaining seven weeks of the year.

With Black Friday less than two weeks away, retailers are hoping consumers will be willing to open their wallets during the all-important holiday sales period, helping fuel the economic recovery.

Kicking off the week will be the government’s monthly retail sales report, which investors hope will shed light on how much consumers will be willing to spend.

"Next week is all about consumer spending and the holiday," said Burt White, chief investment officer at LPL Financial.

Retail sales have shown some improvement recently, suggesting that consumers are suffering from "frugal fatigue" and may be more willing to splurge this holiday season, White said.

A rebound in consumer spending, which accounts for the bulk of U.S. economic activity, could help fuel bets that a recovery is firmly underway.

The outlook for consumer spending remains murky with the national unemployment rate at a 26-year high of 10.2%.

"In this environment, anything associated with jobs is probably the most important thing," said Quincy Krosby, market strategist at Prudential Financial.

To that end, investors will likely pay close attention to Thursday’s report on the number of Americans filing first-time claims for state unemployment benefits.

Investors will also focus on the plight of the U.S. dollar, which wallowed near a 15-month low against the euro for most of last week.

The dollar has been taking a beating recently as investors take advantage of rock-bottom interest rates in the United States to bulk up on more risky assets.

"For now, it’s still sell the dollar and buy risk," White said. "It’s a crowded trade, but a good one."

Stocks ended the week on a high note, logging the second consecutive week of gains as optimism about the recovery gained momentum. The question on investors’ minds this week will be ‘can that momentum be sustained?’

Eyes on Bernanke

Demand for riskier assets, like equities, could hit a speed bump Monday afternoon with Federal Reserve chairman Ben Bernanke scheduled to deliver an economic outlook speech at the Economic Club of New York.

While the central bank is not responsible for managing currency fluctuations, some analysts think Bernanke may strike a more hawkish tone given the severity of the greenback’s recent weakness payday loan companies.

Others expect Bernanke to echo recent official policy statements that interest rates will remain "exceptionally low" for an "extended period" of time.

On the docket

Monday: The week starts with a closely watched report on October retail sales before the opening bell.

Economists expect the Commerce Department to report that sales rose 0.9% last month after 1.5% drop, according to consensus estimates gathered by Briefing.com.

Also due Monday morning, a report on manufacturing activity in the mid-Atlantic region and business inventory data from September.

Federal Reserve chairman Ben Bernanke will speak about the outlook for the U.S. economy in New York at midday.

Tuesday: The government’s producer price index comes out before the market opens. Analysts think prices at the wholesale level ticked up 0.5% in October. Excluding volatile energy prices, the index is forecast to rise 0.1%.

Government figures on capacity utilization and industrial production in October are due out at 9:15 a.m. ET.

The market will also digest quarterly financial results from Home Depot (HD, Fortune 500), Target (TGT, Fortune 500) and TJX Companies (TJX, Fortune 500) before the opening bell.

Wednesday: The housing market will be in focus with reports on housing starts and building permits released before the market opens.

Also before the opening bell, the government’s closely-watched inflation gauge is expected to show that consumer prices were flat in October. Excluding food and energy, prices are expected to have risen 0.1% last month after a 0.2% increase the month before.

Thursday: The Labor Department reports on the number of Americans filing new claims for unemployment benefits at 8:30 a.m. ET.

Jobless claims fell to 502,000 filings last week and analysts say a figure below 500,000 this week could help push the market higher.

A report on leading economic indicators comes out after the market opens.

Sears Holdings (SHLD, Fortune 500) will report quarterly earnings in the morning, while PC giant HP (HPQ, Fortune 500) and apparel-maker Gap (GAP, Fortune 500) will post earnings after the closing bell.

Friday: No economic reports are on the docket. 

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India’s industrial production rose the most in 22 months, suggesting the central bank may have scope to make an early exit from emergency stimulus measures.

Output at factories, utilities and mines jumped 10.4 percent in August from a year earlier after gaining a revised 7.2 percent in July, the statistics agency said in New Delhi today. Economists were expecting a 9.7 percent increase.

Manufacturing across Asia is showing signs of recovery, prompting policy makers to consider when they can begin to withdraw the monetary and fiscal stimulus initiated to protect their economies from the global recession. Central bank Governor Duvvuri Subbarao last week said India may need to act ahead of advanced economies due to “incipient” inflation pressures.

“With doubts over the durability of India’s upswing fading all the time, and inflation pressures already high, policy rates look certain to move up soon,” said Kevin Grice, an economist at Capital Economics Ltd. in London. “We still expect a first hike in January but the possibility of a first move at the Oct. 27 monetary policy meeting now looks close to a 50:50 call.”

India’s benchmark stock index has more than doubled from a three-year low in March as foreign inflows rebounded and demand improved for cars, air conditioners, refrigerators and homes.

The central bank cut interest rates six times between October and April and the government reduced taxes on consumer products and imports, together providing a stimulus worth more than 12 percent of India’s gross domestic product.

Interest Rates

At its last meeting on July 28, the Reserve Bank held its reverse repurchase rate at 3.25 percent and maintained the repurchase rate at 4.75 percent. The cash reserve ratio was kept unchanged at 5.0 percent.

India’s industrial production probably continued to improve last month. The Purchasing Managers’ Index compiled by HSBC Holdings Plc and Markit Economics increased for a sixth straight month in September, according to an Oct. 1 report. The gauge rose to 55 last month from 53.2 in August.

“There are sure signs of a durable manufacturing recovery,” said Sonal Varma, an economist at Nomura Securities Co no faxing payday loan. in Mumbai. “The downside is clearly behind us and we think India and China will lead the recovery in the Asia-Pacific.”

Factory output is improving across Asia as close to $1 trillion in government stimulus and record-low interest rates help the region lead the world economy out of the worst global recession since the 1930s.

China’s industrial production rose 12.3 percent in August from a year earlier, the most in 11 months. Malaysian output fell the least in 10 months.

Tax Revenue

Indian factory output may rise by more than 10 percent in the coming months as indicated by tax-collection figures and companies’ sales, according to Nomura’s Varma.

Reliance Industries Ltd., India’s most valuable company, paid 11.6 billion rupees ($249 million) in advance taxes in the quarter to Sept. 30, 69 percent more than the April-June period, the finance ministry said Sept. 22. State Bank of India paid 18.3 billion rupees and Oil & Natural Gas Corp. provided 17.96 billion rupees. Higher tax payments indicate rising sales.

Bajaj Auto Ltd., India’s second-largest motorcycle maker, sold 14 percent more vehicles in September from a year earlier and Tata Motors Ltd., India’s biggest maker, reported a 5.8 percent increase in sales in the month.

Policy makers will have to “strike a balance” in setting interest rates and shouldn’t compromise on growth in order to tame inflation, Finance Minister Pranab Mukherjee said Oct. 8.

India’s economic growth accelerated in the June quarter for the first time since 2007, with GDP increasing 6.1 percent from a year earlier. The central bank expects the $1.2 trillion economy to expand 6 percent in the year to March 2010, slower than the 8.7 percent average growth in the previous four years.

“Growth is recovering fast,” said Chetan Ahya, an economist at Morgan Stanley in Singapore. There’s “more than an even chance” the Reserve Bank in this month’s monetary policy statement will increase its cash reserve ratio by 50 basis points, he added.

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The U.S. service sector in September expanded for the first time since August 2008, growing at a faster pace than expected to take the benchmark index to its highest since May 2008, according to a report released on Monday.

The Institute for Supply Management’s services index rose to 50.9 last month from 48.4 in August, above economists’ median forecast for a rise to 50.0.

The dividing line between growth and contraction is 50 and the last time the index was above 50 was in August 2008, which was followed by a reading of 50.0 in September, 2008.

The index reading for September, 2009 was the highest since it posted at 51.2 in May, 2008.

“This is a good way to start off the week after a sour nonfarm payrolls on Friday,” said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. “We need to see the service sector doing better because it’s such a big part of the economy.”

The services sector represents about 80 percent of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants.

U.S. stocks edged up after the data with the benchmark Standard and Poor’s 500 index around 1,029 points while U.S. Treasury debt prices were little changed, leaving the benchmark 10-year yield around 3.18 percent.

The U.S. dollar was little changed against other major currencies.

The prices paid component of the index fell to 48.8 in September from 63.1 in August, while the new orders index rose to 54.2 in September from 49.9 in August, its highest since October, 2007.

The employment index rose to 44.3 last month from 43.5 in August. The reading for September was the highest since August, 2008.

“The employment component of the ISM data improved, which was a welcome development, and business activity picked up handsomely,” Woolfolk said. “New orders are also up big. This is a solid report that is consistent with a glass-half-full outlook.”

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Kraft and Cadbury CEOs are meeting their investors to seek support in a bid battle after the British confectioner asked the UK Takeover Panel to set a time limit to Kraft’s 9.8 billion pound ($16 billion) offer.

Cadbury’s Todd Stitzer and Kraft’s Irene Rosenfeld are attending the two-day Bank of America/Merrill Lynch Global Consumer and Retail Conference on Tuesday and Wednesday and meeting with investors individually or in small groups.

“Both are speaking to their investors today, but they are not expected to meet each other,” one source with knowledge of the situation said.

Kraft is keen to talk to Cadbury’s management about the cash and shares bid it launched two weeks ago, but Cadbury’s has dismissed the offer as undervaluing the world’s second-largest confectionary group.

Cadbury shares closed up 0.1 percent at 788-1/2 pence on Tuesday compared with Kraft’s bid, which currently values Cadbury at 718p. Kraft shares were off 1.3 percent at $26.41 by 1540 GMT.

On Monday, Cadbury contacted the UK Takeover Panel to send a “put up or shut up” request to Kraft, under which the U.S. food group will be asked to make a formal bid within a set timetable or walk away for six months, sources close to the matter said.

The sources said the Takeover Panel was likely to give a ruling this week and expected it to give Kraft some four to eight weeks to make its formal offer. They added that this was likely to be toward the longer timeframe as the bid has only been made public for two weeks.

Bidders normally wait for as long as possible before making a formal bid. When Heineken and Carlsberg won a joint bid for Britain’s last big brewer Scottish & Newcastle in 2008, the Takeover Panel gave the bidders five weeks to come up with a formal offer after a battle that had already lasted two months.

The speed of the “put up or shut up” request surprised the market, but the sources said it reflected the lack of a white knight bidder to deflect Kraft’s approach. It also reflects Cadbury’s desire to pressure Kraft on its financing for the bid.

“Kraft does not have unlimited firepower but can probably manage 850-860p, but it would come under pressure if Kraft shares start to fall,” said one banking source.

Analysts say Kraft will need a bid of 850-900p to win Cadbury and not lose investment grade rating on its debt, and could increase its annual cost saving target of $625 million to help make the deal work financially.

Kraft needs to secure financing for an offer before presenting it to Cadbury, but the sources say Kraft should have little problem in doing so. Kraft is offering 40 percent of the bid price, or 300p, in cash and the rest in new Kraft shares.

($1=.6121 Pound)

(Reporting by David Jones; Editing by Hans Peters and Lin Noueihed)

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Facing dwindling sales, Chrysler is discovering that it is easier to reinvent a balance sheet than a line-up of cars and trucks.

Now the clock is ticking, analysts say, and the coming months will be crucial to the bid by Italy’s Fiat SpA to reinvent auto operations starved of investment in the run-up to Chrysler’s bankruptcy.

After a quick makeover in Chapter 11 and some $14 billion in U.S. government funding, Chrysler has been given a clean balance sheet and much-needed small car technology from its new partner.

But its sales remain under pressure and analysts caution that fixing Chrysler’s product difficulties will not be fast, easy or cheap.

“The ultimate heartbeat of a car company is the ability to bring out vehicles that will sell,” said Van Conway, a restructuring expert at Conway MacKenzie. “There is a large question mark for Chrysler out there.”

Chrysler’s U.S. sales fell 15 percent in August, when overall industry sales rose 5 percent. Equally troubling was that its market share fell to 7.4 percent in August — from 11 percent in 2008.

After freezing product development to conserve cash under former owner Cerberus Capital Management CBS.UL, Chrysler faces a dearth of new model launches, analysts say.

The result: Chrysler lacks small and fuel-efficient cars. Its truck-heavy lineup was called “woefully uncompetitive” by Consumer Reports in its latest issue.

With an average fuel economy of 28 miles per gallon for its fleet, Chrysler has the least fuel-efficient lineup among major automakers. General Motors’ GM.UL average is 31 mpg, Toyota Motor Corp 36 mpg, Honda Motor Co 37 mpg, according to U.S. government data.

Erich Merkle, an analyst at Autoconomy.com, said he expects Chrysler’s market share could drop as low as 4 percent by 2011. Merkle and other analysts said Chrysler will face a tough year in 2010 because it will feel pressure to drop unprofitable and slower-selling models like the Sebring.

At the same time, small cars from Fiat, including the 500, are not expected to arrive until early 2011.

“Fiat may have the products and powertrains that will add to Chrysler’s ability to do business. But 18 months is a lifetime in this industry,” said Gary Dilts, senior vice president of forecasting at J.D.Power & Associates.

“They don’t have the option to wait for new products. Timing is the key to its survival,” said Dilts, who headed Chrysler’s U.S. sales before joining J.D.Power in 2007.

DIFFERENT CHRYSLER

Chrysler Chief Executive Sergio Marchionne, who also heads Fiat, said last month that the U.S. automaker was still burning cash but the rate had slowed. 

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At 16, and with $640 billion in assets, the U.S. exchange-traded fund industry isn’t exactly wet behind the ears.

ETFs still lag far behind U.S. mutual funds’ more than $10 trillion in assets. But ETFs are gaining on their more established rivals, due in part to a selling point that’s been a big draw in volatile markets. ETFs can be traded like stocks throughout daily trading sessions, unlike mutual fund shares that change hands at end-of-the-day prices.

Clearly, investors are getting the ETF bug. Nearly $184 billion flowed into U.S. ETFs during the 12 months ended July 31, while stock and bond mutual funds saw $81 billion go out, according to the Investment Company Institute.

With more than 700 ETFs in the U.S., the offerings have become so diverse that you can gain exposure to everything from oil industry equipment suppliers to the movements of foreign currencies like Sweden’s krona. Most ETFs track a market index and focus on stocks, but actively managed ETFs and bond ETFs have also entered the fray.

Michael Latham is at the center of it all as U.S. head of Barclays’ iShares business, which commands about half the U.S. ETF market.

IShares’ leadership in a growing industry is a key reason why New York-based asset manager BlackRock Inc. is acquiring Barclays Global Investors, the investment arm of London-based Barclays. BlackRock announced plans three months ago to snap up BGI in a $13.5 billion deal expected to close by year end.

In a recent interview, Latham, 43, discussed growth prospects and challenges for San Francisco-based iShares and the ETF industry. Here are excerpts:

Do you expect any big changes after BlackRock becomes iShares’ new owner?

We really don’t expect any major change at all cheap credit report. We are going to continue to focus on educating financial advisers and investors about how ETFs work.

Many newer ETFs are narrow, tracking the performance of a single industry, overseas market or commodity. Do you see the niche trend continuing?

Some folks are getting into the market and realizing it’s not as simple as maybe they thought, and then are exiting.

We’re not looking for an investment fad. We’re looking to provide the building blocks of different asset classes for long-term investing.

In June we launched an ETF that focuses on Peru, the iShares MSCI All Peru Capped Index. It already has $70 million in assets. But we don’t evaluate product development based on assets gathered in the first year.

Any other new growth areas you see?

We’ll also be doing more bond ETFs because we think the fixed-income market is underserved. And we’ll be looking at more strategy-based products — it might be asset-allocation products, or more complex products.

What about actively managed ETFs?

We’re looking at it. But I think there is a lot of complexity around what you define as an active product. If you start with a true active stock selection, I find it hard to see how that works in a fully transparent ETF.

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