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Federal Reserve officials are considering whether to use next week’s policy statement to suppress any speculation they’re prepared to raise interest rates as soon as this year.

While policy makers have signaled they accept an increase in longer-term Treasury yields as the economy improves, some are concerned at any premature anticipation of rate rises. Fed staff have examined the Bank of Canada’s public intention of foregoing an increase until 2010, according to a person familiar with the matter, without concluding the statement has proven effective.

One option would be to emphasize in the June 24 statement that increasing slack in the job market and U.S. manufacturing will keep inflation low and a recovery muted, said Michael Feroli, an economist at JPMorgan Chase & Co. in New York and former member of the Fed Board staff. At stake: keeping borrowing costs low enough to foster a sustained recovery, without binding the central bank to a single course of action.

“There are ways of highlighting their low rate expectations without over-committing,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

Chairman Ben S. Bernanke and his fellow Federal Open Market Committee members gather in Washington June 23-24. Economists forecast they will keep their target for the benchmark federal funds rate at zero to 0.25 percent. Policy makers will also discuss any changes to their commitment to purchase as much as $300 billion of Treasuries and $1.45 trillion of housing debt.

‘Extended Period’

In its past two statements, the FOMC has said “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

Markets have signaled they’re no longer heeding that language. Two-year Treasuries have slid since a June 5 government report showed the smallest decline in payrolls in eight months, with the notes yielding 1.18 percent late yesterday, up from 0.91 percent at the start of the month.

Federal funds futures contracts for March carry a yield of 0.765 percent, indicating some probability of a rate boost by the first quarter of 2010.

While job losses are slowing, Fed officials have repeatedly warned that the unemployment rate is likely to climb for months to come. President Barack Obama said yesterday in a Bloomberg Television interview he anticipates the rate will reach 10 percent this year, from 9.4 percent in May.

New Forecasts

Fed governors and district-bank presidents will bring a fresh round of economic forecasts to the central bank’s boardroom next week. They are likely to raise their unemployment forecast from a previous projection of 9 percent to 9.5 percent for the fourth quarter of next year, analysts said.

Enhancing the statement with details on their latest views on inflation and joblessness might be the best way to back markets down from expected rate hikes. JPMorgan Chase estimates that labor-market slack won’t disappear until the unemployment rate drops to around 6 percent.

“How do you get people to believe what you have been saying?” Feroli said fast payday loan no faxing. “You say you are going to have a very large output gap for an extended period,” and even if the economy picks up “you still have a massive resource gap in the labor market.”

An output gap is an estimate of the difference between the economy’s potential to grow given resources such as labor and manufacturing capacity and its actual growth rate. The estimate figures into Fed calculations about future inflation.

Increasing Slack

Underscoring the still-increasing slack in the economy, the Fed yesterday reported that the share of the nation’s industrial capacity in use dropped to a record low of 68.3 percent in May.

“They need to put something in writing in the statement related to the way they see the economic outlook,” said Stephen Stanley, chief economist at RBS Securities Inc. in Stamford, Connecticut. “The level of activity is still very low, and inflation will be benign for the foreseeable future.”

Longer-term Treasury yields have risen even more than those on short-term securities, an indication some investors are anticipating faster gains in consumer prices. Fed officials have signaled they’re comfortable with the increase so far.

“The economy is doing better and less worse than it was before; I am not surprised to see rates back up,” Dallas Fed President Richard Fisher said in a June 15 interview with Bloomberg Television. “There is so much slack in the system,” he also said. “The idea of tightening from where we are — I don’t see it in the immediate future.”

Bernanke History

Bernanke was a proponent of using statement language to tether short-term rate expectations when he was a Fed governor in 2003. Then-Chairman Alan Greenspan introduced the phrase “considerable period” in August of that year to put a time commitment on the existing 1 percent rate target.

Bernanke supported Greenspan in a debate over the phrase at the August meeting: “The addition of the sentence will go some way to bringing policy expectations in the market toward what I heard around the table during the entire meeting today,” he said, according to an FOMC transcript.

The Bank of Canada recently took time commitment a step further. On April 21, the Canadian central bank reduced its key rate to 0.25 percent, the lowest in its history, and said that “conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010.”

A calendar commitment isn’t likely to prove popular with all Fed officials, because some want to maintain flexibility to reverse the central bank’s record balance-sheet expansion in excess of $1 trillion over the past year.

“Part of rightsizing will be to decide where boldness ends,” Charles Evans, president of the Chicago Fed and voting member of the FOMC, said June 15.

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European Central Bank council member Ewald Nowotny warned against raising interest rates and ending emergency policy measures too soon, saying the top priority must be to revive economic growth in the euro region.

“I’d warn against a premature exit strategy,” Nowotny, who heads Austria’s central bank, said at a conference in Vienna late yesterday. “We are still in a crisis. The primary goal should be to restore economic growth as fast as possible.”

Nowotny’s remarks contrast with those of fellow ECB council members including Germany’s Axel Weber, who has repeatedly said the bank should raise interest rates and withdraw extra liquidity quickly once the economy starts to gather strength. The ECB on June 4 kept its benchmark rate at a record low of 1 percent. It has announced plans to purchase 60 billion euros ($83 billion) of covered bonds and loan banks as much money as they need for up to 12 months to counter the worst economic slump since World War II.

“What the ECB is doing is adequate for the time being,” Nowotny said. The bank will monitor the impact of the measures and “if necessary, there will be adjustments,” he said, adding that he sees no need for additional action at the moment. “The banking sector is more or less under control, but there still is a very intensive crisis of the real economy.”

The ECB expects the euro-region economy to contract about 4.6 percent this year and around 0.3 percent in 2010. ECB council member Athanasios Orphanides yesterday cautioned against reading too much into signs of stabilization, saying there is no evidence yet that the world is emerging from the recession.

‘Very Dangerous’

Nowotny called the slump “a very deep depression” and said Europe needs “active monetary and active fiscal policy.” Considering exit strategies too early “would be very dangerous,” he said.

The ECB’s 22-member Governing Council has been split over how to tackle the crisis bad credit cash loan. Policy makers such as Slovenia’s Marko Kranjec and Cyprus’ Orphanides have indicated the ECB could purchase a broader range of assets to fight the recession, while Bundesbank President Weber argues that buying assets to flood the economy with money is an unnecessary risk that could sow the seeds of future crises.

“Maintaining an overly expansionary monetary policy for too long in some currency areas was probably one of the framework conditions that contributed to the emergence of the global financial crisis,” Weber said last week. “We will counter potential risks to price stability early on and, at the same time, make a contribution to avoiding future financial crises.”

Inflation Threats

The Federal Reserve, Bank of England and Bank of Japan have lowered their key interest rates to close to zero and are buying government and corporate bonds, effectively printing money to reflate their economies in a policy known as quantitative easing.

“The Fed is acting more aggressively; the ECB is lagging behind,” Nouriel Roubini, the New York University economics professor who predicted the financial crisis, told Handelsblatt in an interview published today. “European central bankers are underestimating to what extent the crisis will hurt Europe.”

Roubini said the ECB is still “too concerned about inflation like in the past” while European governments are not spending sufficient money, according to the interview. Still, liquidity “needs to be reduced next year in a timely manner or we’re threatened by inflation in the future,” he said.

Asked if expansionary policies will fuel inflation, Nowotny said such concerns are “unfounded.”

Speaking at the same conference yesterday, ECB Executive Board member Gertrude Tumpel-Gugerell said central banks should act preemptively to prevent asset-price bubbles from forming.

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The International Monetary Fund, which has rescued economies from Pakistan to Iceland in the past year, raised its outlook for the U.S. and called for steps to reduce concern about rising public debt and inflation.

The IMF forecasts the world’s largest economy will contract 2.5 percent this year before expanding 0.75 percent in 2010, according to a statement today after an annual staff analysis of the U.S. In the IMF’s World Economic Outlook report released in April, the U.S. was forecast to contract 2.8 percent this year before stalling in 2010.

The Washington-based lender said a “gradual” recovery is likely with downside risks “tilted to the upside.” The Federal Reserve could ease credit further if conditions worsen and additional fiscal stimulus “could also be considered” in the event the economy doesn’t bounce back, the IMF said.

“The combination of financial strains and ongoing adjustments in the housing and labor markets is expected to restrain growth for some time, with a solid recovery projected to emerge only in mid-2010,” the IMF staff report said.

Today’s statement said a solid recovery is unlikely until the middle of next year as unemployment peaks close to 10 percent.

The report praised the efforts of the Fed, the Obama administration and Congress, calling the economic stimulus package “well targeted” and saying monetary policy is relieving financial strains. It also warns that the extraordinary measures required to stabilize the economy and financial markets must be followed by a plan to unwind them as soon as possible to avoid a rise in inflation.

Inflation Concern

“Monetary and fiscal stimulus may stoke concerns about inflation and rising debt, exerting upward pressure on interest rates,” the statement said. “Unwinding interventions will pose major challenges, and — given the high level of cross-border competition in the financial sector — will need to be coordinated internationally to facilitate a smooth exit multiple car insurance quotes.”

The U.S. jobless rate climbed to 9.4 percent in May, the highest since 1983, according to Labor Department data. Falling home prices, coupled with near-record low mortgage rates and tax credits for first-time buyers, may help bring an end to the worst residential construction slump in seven decades. Reports this week are forecast to show builders began work on more houses as sales steadied and consumer prices rose.

The IMF projects the U.S. stimulus package will raise gross domestic product growth by 1 percent this year and 0.25 percent in 2010. The fund also said additional spending could also be considered.

Deficits Rising

The IMF staff projects federal deficits will average 9 percent of GDP from 2009 through 2011, and public debt will almost double to 75 percent of GDP.

The increased debt “may put significant pressure on Treasury bond rates,” the fund said.

Along with fiscal measures, the IMF staff mission offered its analysis of the American financial industry, saying that while steps taken by the Federal Reserve and Federal Deposit Insurance Corp. have “done much to stabilize financial conditions,” its unclear whether the administration’s Public- Private Investment Program will be used effectively.

The fund cautioned that the “ramping up” of the Term- Asset Backed Securities Loan Facility, known as TALF, and further purchases of Treasury debt and mortgage-backed securities could “substantially” inflate the Fed’s balance sheet.

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President Barack Obama said the government can save $313 billion over the next 10 years by forcing greater efficiency in Medicare, demanding better prices from drugmakers and cutting the number of uninsured Americans.

Obama, in his weekly address on the radio and Internet, outlined the projected savings to help demonstrate that his plan to revamp the U.S. health-care system won’t add to a deficit that’s projected to swell to a record $1.8 trillion this year.

“These savings underscore the fact that securing quality, affordable health care for the American people is tied directly to insisting upon fiscal responsibility,” Obama said.

How to pay for the overhaul has emerged as one of the key points of debate as the administration and Congress work to meet the October deadline Obama set for final passage of legislation. The $313 billion would be in addition to the $635 billion “down payment” the president put into his fiscal 2010 budget for the health-care proposal. The earlier figure includes a combination of tax increases for wealthier Americans and other savings in the federal Medicare and Medicaid programs.

White House Budget Director Peter Orszag said the additional revenue along with cuts and projected savings will cover the estimated $1 trillion cost of a health-care overhaul even if the final, total figures “are still undetermined.”

“We are making good on this promise of fully financing health care reform over the next decade,” Orszag said in a conference call with reporters yesterday.

Higher Estimates

The administration’s cost estimates are lower than those of private analysts. Gail Wilensky, a former administrator at the Centers for Medicare and Medicaid Services, has said the cost may approach $1.5 trillion and other projections are as high as $2 trillion.

In a fact sheet released with the president’s address, the administration projects that “productivity adjustments” to Medicare payments tied to productivity gains in the broader economy would save $110 billion over a decade. It would “encourage greater efficiency” while “more accurately aligning Medicare payments with provider costs,” the fact sheet says.

A further $106 billion would be saved by expanding the number of people with insurance coverage. That would cut payments the government makes to hospitals for treating uninsured patients, according to the administration.

Pledge to Industry

Citing a May pledge by industry groups, including the Pharmaceutical Research and Manufacturers of America, to reign in the growth of medical costs, Obama is projecting $75 billion in savings through “better prices” for drugs paid for in the Medicare prescription program. They way to do that would be part of negotiations with Congress, the fact sheet says.

The administration estimates $22 billion would be saved through such steps as adjusting payment rates for magnetic resonance imaging and similar procedures, as well as for skilled nursing and rehabilitation services and cutting waste and abuse cash loans online.

“These savings are rooted in the same principle that must guide our broader approach to reform: we will fix what’s broken, while building upon what works,” Obama said.

The president’s address today expands on measures he outlined earlier this week at an event in Green Bay, Wisconsin. As he continues to lobby the public and the health-care industry, he will travel to Chicago June 15 to give a speech to the annual meeting of the American Medical Association, the nation’s largest doctors’ group.

Economic Link

“This is the moment when we must reform health care so that we can build a new foundation for our economy to grow,” Obama said in his radio address today.

In Congress, lawmakers are working on health-care legislation that will include tax increases and spending cuts.

The Senate Finance Committee may unveil a draft bill by the middle of next week. Yesterday, members of the House Ways and Means Committee met to confront what Chairman Charles Rangel, a New York Democrat, called the “heartburn” of trying to find a way to pay for it.

The Republicans in their weekly address turned to another subject, energy.

Representative Mike Pence said Democratic legislation to curb emissions of greenhouse gases through a so-called cap-and- trade system would cost American families $4,300 per year in higher energy costs and lead to the loss of U.S. jobs.

“This national energy tax amounts to an economic declaration of war,” Pence, of Indiana, said in the radio and Internet address. “That’s a heavy price to pay for a plan that will do very little to clean up our environment.”

Domestic Exploration

As an alternative, Pence said Republicans are offering an “all-of-the-above” energy plan. It calls for greater domestic oil and gas exploration, expanded use of nuclear power, investments in alternative and renewable energy sources and incentives for conservation, he said.

Pence said it is “the comprehensive energy solution this country desperately needs to achieve energy independence, create good jobs and help our environment.”

Obama’s address and details of the cost savings were released to reporters last night with the understanding that they wouldn’t be published until 6 a.m. today. The Wall Street Journal published a story on its Web site reporting the speech and the savings early this morning.

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Bank of America CEO Ken Lewis heads to Capitol Hill on Thursday, and he’s likely to be grilled by lawmakers about the government’s role in ensuring that the bank complete its controversial merger with Merrill Lynch.

According to e-mails released Wednesday that pull back the curtain on heated negotiations, Federal Reserve Chairman Ben Bernanke had suggested to another Fed official that "management is gone," if BofA managers tried to flee the deal and later on needed further government assistance.

The revelations come thanks to congressional subpoenas demanding that the Fed disclose e-mails related to Bank of America’s purchase of Merrill. CNNMoney.com acquired copies of some of the e-mails circulated among House Republicans late Wednesday.

Lewis is the sole witness of a House Committee on Oversight and Government Reform hearing Thursday about the BofA-Merrill deal titled "Bank of America and Merrill Lynch: How Did a Private Deal Turn into a Federal Bailout?"

He is expected to be asked specifically about whether the Federal Reserve and other government officials pressured Bank of America (BAC, Fortune 500) into completing the merger even after BofA realized how badly Merrill Lynch’s fourth-quarter losses would be.

The BofA-Merrill Lynch deal was valued at $50 billion when it was announced in mid-September — the same day that Lehman Brothers declared bankruptcy. But the deal’s worth dropped to $19 billion after Bank of America’s shares plunged in following months.

Regulators eventually agreed to give BofA $20 billion in new capital and $118 billion in asset guarantees to cover possible losses tied to the transaction.

Lewis told investigators in the New York Attorney General’s office earlier this year that he felt his job was on the line if he didn’t go through with the deal. Once Lewis learned last December of Merrill Lynch’s deterioration, he told then Treasury Secretary Henry Paulson that BofA was considering backing out of the deal, according to his testimony to investigators.

Paulson said that Lewis and the BofA board would be replaced if they sought to end the merger, which Paulson viewed as integral to the health of the U.S. financial system. Paulson told New York investigators that he threatened Lewis’ job at the behest of Fed chief Ben Bernanke absolutely free credit report.

According to a Dec. 21 e-mail released Wednesday, Bernanke called BofA’s threat to pull out of the deal a "bargaining chip," saying "we do not see it as a very likely scenario."

In another e-mail, Federal Reserve Bank of Richmond President Jeffrey Lacker said that Bernanke considered Bank of America’s threat to pull out "irrelevant" and "not credible."

Lacker added that Bernanke "also intends to make clear that if they play that card and they need assistance, management is gone," Lacker wrote. BofA is based in Charlotte, N.C., which is in Lacker’s district.

The series of e-mails and other documents released Wednesday also called into question the notion that Merrill Lynch’s last hope laid with the BofA deal. It appeared that the Fed was willing to provide support to Merrill in order to avoid another collapse like Lehman Brothers.

In one document that listed contingency plans for Merrill if BofA decided to abandon the merger, the Fed said that there were "emergency liquidity provision actions that could be taken to provide some time for the sale/disposition of [Merrill Lynch] businesses and assets."

A Federal Reserve spokeswoman declined to comment on the e-mails.

Bank of America spokesman Lawrence Di Rita said that while he wouldn’t comment on internal documents he hasn’t seen, he pointed out the unusually tense and crisis-mode environment that overshadowed the negotiations.

"Stepping back, though, it is important to remember the circumstances in which these discussions were taking place: a crisis in financial markets and in the economy generally," Di Rita said. "Serious people were working hard to make decisions to stabilize and improve the situation. In hindsight, it’s interesting to look at all of that, but we’re looking forward."

CNN Congressional correspondent Brianna Keilar contributed to this report. 

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China’s consumer prices fell for a fourth month, making it easier for the government to keep interest rates low and boost spending to revive the world’s third-largest economy.

Prices dropped 1.4 percent in May from a year earlier, after falling 1.5 percent in April, the statistics bureau said today. The median estimate in a Bloomberg News survey of 16 economists was for a 1.3 percent decline. Producer prices fell 7.2 percent, the most on record.

Inflation may return as the economy recovers and commodity prices climb from last year’s lows. The central bank triggered an explosion in credit this year by scrapping restrictions on growth in new loans and keeping the one-year lending rate at a four-year low of 5.31 percent.

“China’s economy is already rebounding and as soon as it regains momentum, prices will return to positive territory,” said Sherman Chan, an economist with Moody’s Economy.com in Sydney.

The Shanghai Composite Index of stocks rose 0.5 percent as of the 11:30 a.m. local time break in trading. The yuan traded at 6.8330 against the dollar at 12:05 p.m., from 6.8333 before the data was released. Yuan forwards rose on speculation that currency gains will resume as the economy recovers.

Declines in prices in China span consumer goods, food and housing. Producer prices are constrained by industrial overcapacity, the statistics bureau said in a statement.

Deflation Threat ‘Receding’

While falling prices may help the economy by lowering costs for businesses and encouraging consumers to spend, entrenched deflation can choke off demand, as people delay purchases, hoping for better deals in the future.

Energy-price increases may help to end deflation by year’s end, said economist Chan. The National Development and Reform Commission announced on May 31 increases of as much as 8 percent in gasoline and diesel prices after crude oil costs climbed cheap payday advance.

Concerns that deflation may be a threat “are receding as global commodity prices rise and economic indicators generally point to improving fundamentals,” said Jing Ulrich, Hong Kong- based chairwoman of China equities at JPMorgan Chase & Co.

While food fell 0.6 percent from a year earlier as pork plummeted 32 percent, the government is concerned about rising grain prices, the statistics bureau said. Grain climbed 5 percent from a year earlier and has gained month-on-month since January.

Home prices fell 0.6 percent in May from a year earlier, the government said in a separate report today.

Inflation Risk

Consumer prices are falling in countries including the U.S., Japan, Spain, Singapore and Thailand. In Japan, producer prices fell in May by the most since 1987, the government said today, adding to signs that deflation may take root.

China should prepare for the risk that inflation may bounce back faster than economic growth, researchers from the State Information Center wrote in a report in the official China Securities Journal today. The central bank should adjust monetary policy if inflation rises above 3 percent and economic growth remains below 9 percent, they said.

The researchers forecast a return to inflation in the third quarter.

While the Reuters/Jefferies CRB Index of 19 raw materials, including oil and copper, is down about 39 percent from a year ago, it has climbed about 14 percent in 2009.

“I think that we may have seen the bottom of China’s inflation cycle,” said Tao Dong, Hong Kong-based chief Asia economist at Credit Suisse Group AG. “A year from now, people will be worried about inflation instead of deflation.”

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European Central Bank Vice President Lucas Papademos said the region’s credit squeeze persists as banks continue to shrink their balance sheets and demand for loans remains weak.

“The decline in demand for credit and deleveraging processes are limiting the expansion of credit by banks to the credit sector, although the ECB is providing financing to the banks to support themselves,” Papademos said today in an interview in Kyoto, Japan.

The Frankfurt-based ECB, which has cut its benchmark interest rate to a record low of 1 percent, has said it will loan banks as much money as they need for up to 12 months and pledged to buy 60 billion euros ($85 billion) of covered bonds in an effort to revive lending affordable health insurance.

“There is no danger of excessive credit” resulting from the ECB’s monetary easing, Papademos said. Lending is still contracting in some countries and expanding slowly in others, he said.

When asked whether the ECB would consider expanding its funding-support measures, Papademos said: “We are assessing the situation and one cannot say a priori whether we will do it or not.”

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Finland’s economy shrank the most in 18 years in the first quarter as the recession showed no signs of abating in the northernmost euro nation.

Gross domestic product declined 2.7 percent from the previous three months, when it contracted a revised 2.1 percent, Helsinki-based Statistics Finland said on its Web site today. The measure was expected to drop 5 percent, according to the median estimate of four economists surveyed by Bloomberg. The economy shrank 7.6 percent from the year earlier.

Finland, suffering its first recession since 1993, is reeling from a slump in global trade that sent its exports down an annual 35 percent in the first quarter, Finnish Customs said on June 2. Faltering export demand in turn pushed industrial output into a 20 percent decline from the year earlier.

“The change in the economy from a year earlier was really drastic,” said Pasi Sorjonen, chief economist at the ETLA research institute in Helsinki, who expected the economy to shrink 6.5 percent in the first quarter. Still, “the figures were better than I feared payday advance.”

Output has fallen for four consecutive quarters, slumping the most since the first quarter 1991. Neighboring Sweden, the largest Nordic economy, has been in recession for three consecutive quarters, recording a 0.9 percent drop in GDP in the first three months of the year, compared with the final quarter of 2008.

Manufacturing and construction slid 17.9 percent from a year ago, while services shrank by 3.7 percent, the statistics office said.

Finland’s traded companies’ market capitalization is at $168 billion, about the size of Google Inc. and Yahoo! Inc. combined. Nokia Oyj, the world’s biggest maker of mobile phones, accounts for a quarter of the market.

Today’s quarterly GDP decline matched the biggest previous drop, recorded in the first quarter of 1991, when the economy was reeling from the effect of a banking crisis that ravaged the country in the early 1990s.

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Japan’s corporate bankruptcies dropped for the first time in 12 months and merchant sentiment climbed to a one-year high, signs that the economy is starting to recover from its deepest postwar recession.

Bankruptcies fell 6.7 percent in May from a year earlier to 1,203 cases, Tokyo Shoko Research Ltd. said in Tokyo today. The Economy Watchers index, a survey of people who deal with consumers, climbed to 36.7 last month from 34.2, the Cabinet Office said today in Tokyo, the highest since March 2008.

The yen rose on speculation an economic revival will spur demand for the nation’s assets. Industrial production and exports are improving, and Prime Minister Taro Aso’s stimulus packages have provided consumers with 2 trillion yen ($20 billion) in cash handouts as well as helped small businesses get access to credit.

“Government policy is working,” said Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo. “The wheels are not falling off.”

The yen strengthened to 98.46 per dollar at 2:41 p.m. in Tokyo from 98.64 late in New York on June 5. The Nikkei 225 Stock Average climbed 1.1 percent, extending its gains to 40 percent since it slumped to a 26-year low on March 10.

Exports rose 7.2 percent in April from March, the second month-on-month gain, the Finance Ministry said today. Factory production surged the most in 56 years in April and manufacturers including Toyota Motor Corp. and Canon Inc. plan to increase output in coming months.

More Confident

“Companies are starting to increase production, and that’s helping households be more confident about incomes and jobs,” said Tatsushi Shikano, a senior economist at Mitsubishi UFJ Securities Co personal business cards. in Tokyo. “Sentiment is on track to recover.”

The Economy Watchers outlook index climbed to 43.3 last month, the fifth straight gain and the highest since September 2007. A reading above 50 means optimists outnumber pessimists.

Canon last week said it will begin construction of a digital-camera factory in July. Toyota will resume overtime work this month to boost output of its Prius hybrid, public broadcaster NHK reported last month.

The government announced in April that it will expand a credit-guarantee program for small and midsized companies to 30 trillion yen ($305 billion) from 20 trillion yen. It also has expanded so-called safety-net loans to smaller companies through the state-run Japan Finance Corporation to 12 trillion yen from 9 trillion yen.

Still, some economists including former Economy Minister Hiroko Ota say a recovery isn’t sustainable because corporate profits are dwindling.

Companies slashed spending at the fastest pace in 54 years last quarter and profits tumbled a record 69 percent, the Finance Ministry said last week. The unemployment rate rose to 5 percent in April, the highest in more than five years, and about two work seekers are competing for a single spot, the most severe job shortage on record.

“The worst is over but I can’t say the economy is heading for a recovery at all,” Ota said.

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Indonesia’s central bank cut its benchmark interest rate for a seventh straight month to help bolster Southeast Asia’s fastest-growing economy.

Bank Indonesia reduced its reference rate by a quarter- point to 7 percent, the lowest level since the benchmark was introduced in 2005, according to a statement in Jakarta today. The cut was predicted by 18 of 19 economists surveyed by Bloomberg News.

Policy makers across Asia have slashed interest rates and increased spending to counter the worst global recession since the Great Depression. Bank Indonesia has room to continue to reduce borrowing costs as inflation has slowed to a 23-month low and its benchmark rate remains the highest in East Asia.

“It’s defensible for Bank Indonesia to further cut its rate,” said Kenny Soejatman, director of equity investment at PT Mandiri Manajemen Investasi, which manages about $982 million. “To say that this is the last one would be too strong. We foresee a few more, though beyond this the probability is obviously becoming smaller.”

Lower interest rates may help economic growth in Indonesia remain above other nations in Southeast Asia. The $433 billion economy, which has been less affected than its neighbors by the global slump as it isn’t as reliant on exports, expanded 4.4 percent in the first quarter from a year earlier.

Malaysia, Thailand

Malaysia’s economy shrank 6.2 percent in the three months to March 31 from a year earlier, its first contraction since 2001. Thailand’s gross domestic product fell 7.1 percent in the same period, pushing the nation into its first recession since the Asian financial crisis.

Indonesia’s economy may expand between 3 percent and 4 percent this year, the central bank said in today’s statement Internet Payday loans. Growth next year may range from 4 percent to 5 percent, senior deputy governor Miranda Goeltom said June 1.

Economic growth may benefit in the second half of 2009 and in 2010 from an improvement in consumer sentiment. An index of consumer confidence from the Danareksa Research Institute jumped to a 33-month high of 89.5 in May from 84.1 in April, according to a statement in Jakarta today.

Investors are also more optimistic about Indonesia’s economic prospects after President Susilo Bambang Yudhoyono’s Democrat Party won the most seats in April parliamentary elections, bolstering his bid for re-election in July.

‘Challenging Backdrop’

Still, Indonesian GDP growth may be tempered if the worldwide economic downturn continues to weaken the nation’s overseas sales. Exports fell 22.9 percent in April from a year earlier, the sixth straight month of declines.

“This downward trend in Indonesian export growth is unlikely to reverse any time soon,” said Yip Yee Lan, an economist at BNP Paribas SA in Singapore.

April’s 44.5 percent drop in imports from a year earlier also suggests “sagging” domestic demand, Yip said.

“Indicators of domestic demand activity have not yet seen any clear signs of stabilization,” said Johanna Chua, head of Asia-Pacific economics research at Citigroup Inc. in Hong Kong. This “will likely continue to provide a challenging backdrop for growth this year.”

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