Finance news. My opinion.

The Bank of Japan may decide tomorrow to start withdrawing its emergency credit-easing programs because businesses have regained access to private funding.

Governor Masaaki Shirakawa and his colleagues may say it will allow their corporate debt purchase programs to expire on Dec. 31 as scheduled. The central bank will also hold the benchmark interest rate at 0.1 percent, according to all of the 20 economists surveyed by Bloomberg News.

Shirakawa said on Oct. 3 the need for the bank’s purchases of commercial paper and corporate bonds has diminished, indicating the bank is preparing to terminate the operations. Companies surveyed in the central bank’s Tankan survey released Oct. 1 said it is becoming easier to borrow from banks as the global credit crisis eases.

“The Bank of Japan has explicitly indicated it wants to end the programs,” said Izuru Kato, chief market economist at Totan Research Co. in Tokyo. “Discontinuing them would have little impact on the economy.”

Government bonds fell, sending 10-year yields one basis point higher to 1.29 percent at 12:20 p.m. in Tokyo. The yen traded at 89.82, unchanged from late yesterday and weaker than the eight-month high of 88.01 reached on Oct. 7.

Emergency Programs

Since lowering rates to 0.1 percent in December, the bank started buying commercial paper and corporate bonds from lenders and offering them unlimited loans backed by collateral to channel funds to companies. The policy board extended the three plans to Dec. 31 when it met in July.

People with direct knowledge of the bank’s discussions said in September the bank may make a decision as soon as this month because officials are concerned that continuing the programs for too long would distort capital markets. Economists expect the bank to keep the limitless lending program.

Major companies said their access to funding improved compared with three months ago, the bank’s Tankan survey showed. Large firms said their access to credit has recovered to last year’s levels while small companies said their funding conditions were still tighter than December, the survey said.

Central banks around the world are moving to pare back unprecedented measures to unfreeze credit as the financial industry stabilizes. The Federal Reserve last month said it would shrink programs that auction loans to banks and Treasuries to bond dealers. The European Central Bank said Sept. 24 it will stop its longer-dated dollar liquidity operations because of limited demand.

Bank of England

Meanwhile the British Chambers of Commerce urged the Bank of England to expand its bond-purchase program to as much as 200 billion pounds ($315 billion). “This fragile recovery we’ve started to see really needs to be nurtured,” BCC Director General David Frost said in an interview no fax pay day loan.

The strengthening yen may dissuade the Bank of Japan from deciding tomorrow to let the programs expire, some economists say. Japan’s currency has risen more than 3 percent against the dollar in the past three months, squeezing profits of exporters and threatening the economy’s recovery from its worst postwar recession. The Nikkei 225 Stock Average has fallen 4.2 percent since Aug. 31. It rose 0.4 percent in morning trading.

“It may be difficult for the bank to make a decision this week, given that the stability in the yen and stocks is crucial for ending the corporate programs,” said Naka Matsuzawa, chief investment strategist at Nomura Securities Co. in Tokyo.

Thrown Punches

Government officials have acknowledged the lack of demand for some of the BOJ’s programs, while also calling on policy makers to mind that smaller companies still have difficulty raising funds. Deputy Prime Minister Naoto Kan said last week he hopes the bank will take into account the “severe” state of funding for smaller firms when it debates ending the programs.

“The government has already thrown preemptive punches to the Bank of Japan, but the bank should end buying commercial paper and corporate bonds as planned because the facilities aren’t really being used,” said Teizo Taya, a former BOJ board member and now adviser of the Daiwa Institute Research.

The bank will probably maintain the limitless lending program because there is demand for it, analysts say. It has lent 7.3 trillion yen ($82 billion) under the facility as of Aug. 31. In contrast, it had 100 billion yen of commercial paper on its balance sheet, about 3 percent of the amount it’s allowed itself to hold. The bank held 200 billion yen of corporate bonds, only one-fifth of the limit set by officials.

‘Big Presence’

“The lending facility has a big presence in Japan’s money market, and its end would create a rift between the central bank and the government,” said Seiji Shiraishi, chief economist at HSBC Securities in Tokyo. “The bank will probably extend the program through March 31.”

Scaling back its stimulus doesn’t mean the bank is preparing to raise interest rates, analysts surveyed said. The bank will probably keep the key rate around 0.1 percent at least through the end of 2010, 16 of 17 economists who gave forecasts through the period said.

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Canada’s jobless rate unexpectedly fell last month, signaling that the U.S.’s largest trading partner has begun an economic recovery that may lead the central bank to increase interest rates within the next year.

Employment rose by 30,600, six times more than forecast, on new jobs in construction and government, Statistics Canada said today. The jobless rate fell to 8.4 percent from 8.7 percent in August.

The Canadian dollar and yields on 2-year government bonds rose to their highest levels this year as investors increased bets the Bank of Canada may follow Australia and withdraw some economic stimulus by raising borrowing costs.

“The risks of them going sooner rather than later are increasing at the moment,” said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto, adding he still expects the bank will wait until the middle of next year to raise borrowing costs.

The central bank lowered its benchmark lending rate to 0.25 percent in April and pledged to keep it there through June 2010 unless the inflation outlook changes materially. The lower rates have eased credit conditions for businesses, and made it cheaper for households to take out loans and purchase homes.

The bank released a survey today that showed businesses are the most optimistic about future sales since at least 1998.

Faster Recovery

Because of Canada’s healthier banks, policy makers have claimed stimulus in Canada will be more effective than in other major economies. None of Canada’s 21 banks has received government funding since credit seized up worldwide in August 2007, prompting government officials and organizations like the International Monetary Fund to predict the country will emerge from the global recession at a faster pace than other major economies.

The latest positive data include a 7.2 percent rise in August building permits, a pick-up in factory sales, a larger than expected increase in spending by purchasing managers last month, and a third consecutive monthly increase in home prices, according to the July reading of the Teranet-National Bank price index.

The Canadian dollar appreciated 0.8 percent to C$1.0435 per U.S. dollar at 4:33 p.m. in Toronto, from C$1.0518 yesterday. It touched C$1.0411, the strongest since Sept. 29, 2008.

The yield on Canada’s overnight index swap due in one year, a security based on investor expectations of where the Bank of Canada’s rate will be at that point, rose above 0.6 percent today for the first time since February, trading as high as 0.64 percent. The yield on 9-month swaps rose to as high as 0.45 percent today from 0.39 percent yesterday.

Bond Yields Rising

The yield on Canadian government bonds maturing in December 2011 rose to 1 low interest payday loans.70 percent today, gaining more than one-third of a percentage point from 1.36 since Monday.

Royal Bank of Canada, the country’s biggest lender, today raised its fixed-rate mortgages by as much as 0.35 percentage points.

“The market is starting to speculate whether the Bank of Canada will raise interest rates sooner than it conditionally pledged,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “We still think that the bank will not tighten until July next year, but the risks are more evenly balanced now.”

This week, Australia became the first country in the Group of 20 nations to boost borrowing costs since the start of the credit crisis. The Reserve Bank of Australia increased the overnight cash rate target on Oct. 6 to 3.25 percent from a 49- year low of 3 percent.

Not Australia

“The Bank of Canada is not like the Reserve Bank of Australia,” Derek Holt, an economist at Scotia Capital in Toronto, said in an interview on Bloomberg Television. “The Canadian growth dynamics are very different. We’re much more pointed south to weakness in the U.S. economy.”

While Canada, like Australia, is a major commodity exporter and is benefiting from rising prices for raw materials, roughly three-quarters of the country’s foreign sales are shipped to the lagging U.S. economy. A stronger Canadian dollar, which has advanced 17 percent against its U.S. counterpart this year, is also damping demand for exports.

Statistics Canada said separately today the country’s trade deficit widened to a record C$1.99 billion ($1.9 billion) in August as exports plunged 5.1 percent.

Canadian government officials have sought to damp optimism of a recovery, saying that it is being driven by government stimulus and that private-sector demand remains weak.

U.S. Concern

The public sector, along with manufacturing and construction, led the rise in September employment. Government entities added 36,400 jobs during the month while construction, benefiting from rising home prices and a government stimulus package that targets the industry, added 24,600 jobs during the month.

“My big concern remains the U.S.,” Prime Minister Stephen Harper said today at a press conference in Welland, Ontario. “Even though we’ve had some good jobs news today, we aren’t out of the woods yet.”

Canadian federal and provincial governments are injecting C$61 billion in stimulus over two years to fuel infrastructure spending, boost job benefits and provide tax cuts to households that make home renovations.

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White House economic adviser Lawrence Summers rejected the notion that the U.S. faces an extended period of below-average growth and high unemployment in the wake of the worst recession since the 1930s.

“I would be very reluctant to accept the idea that the American economy no longer has the potential to grow rapidly,” Summers told a forum in New York yesterday organized by Bloomberg LP, the parent of Bloomberg News. “The American people have not become less capable of entrepreneurship. They have not become less dedicated to hard work, and the productive potential of this economy has not declined.”

Mohamed El-Erian, the chief executive officer of Pacific Investment Management Co., has said the U.S. is entering a “new normal” — a sustained period of annual growth of about 2 percent where credit and jobs are less plentiful. In the five years before the recession began at the end of 2007, gross domestic product expanded at an average annual rate of 2.8 percent.

Summers, 54, also repeated the administration’s commitment to a strong dollar, citing recent comments by U.S. Treasury Secretary Timothy Geithner, and he said it’s in China’s interest to reduce its dependence on exports to fuel economic growth.

“He made it very clear that our commitment is to a strong dollar based on strong fundamentals,” Summers said in reference to remarks by Geithner.

Dollar’s Decline

The dollar yesterday fell to its lowest level in almost 14 months against the currencies of six major U.S. trading partners amid signs the global economy is beginning to recover from the recession and as investors seek higher-yielding assets.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, reached 75.767 yesterday in New York, the weakest level since August 2008.

Geithner said Oct. 3 that “it is very important to the United States that we continue to have a strong dollar.” His comments came after policy makers from China to Russia called for an alternative to the world’s main currency in foreign- exchange reserves.

China, the world’s third-largest economy, has amassed a record $2.13 trillion in currency reserves, and it has used some of those reserves to purchase $800.5 billion of U.S. Treasury securities as of July.

“It’s very much in China’s interests, as its economy grows, to be less dependent on exports as the principal engine of economic growth,” Summers said guaranteed pay day loans.

‘Normal Conditions’

In the U.S., Summers said there has been a “substantial return to more normal conditions,” citing economists’ estimates that the economy returned to growth in the third quarter following a recession that began in December 2007.

“We’re looking at a very different economic situation,” he said. He added: “We’re in no position to rest, no position to declare victory.”

He called the $787 billion stimulus package approved by Congress earlier this year “a profoundly important and positive step” on the road to recovery, even as he warned about continued high unemployment.

“We’ve got a substantial period ahead of us until we get back to a fully satisfactory state for the American economy,” he said.

The jobless rate rose to 9.8 percent last month, the highest since 1983, and it is forecast by economists to reach 10 percent by the end of the year.

Payrolls Drop

Payrolls dropped by 263,000 in September, exceeding economists’ forecasts. September’s losses brought total jobs lost since the recession began to 7.2 million, the biggest decline since the Great Depression.

Obama and his advisers are considering a mix of spending programs and tax cuts beyond the stimulus measure, although Summers declined to specify which measures are under consideration.

“We’re carefully studying the experiences that have been accumulated to date,” Summers said yesterday. “There has not been a day when the president and the members of his economic team have not been thinking about strengthening the American economy.”

On the Obama administration’s push for an overhaul of financial regulations, Summers said changes are needed after major economic upheavals every three or four years, such as the collapse of hedge-fund Long Term Capital Management in 1998, and financial crises in Southeast Asia and Mexico.

As lawmakers begin debating Obama’s proposals, rejecting some of his recommendations and changing others, Summers said the administration is not “committed on any precise matter of detail,” although it wants action taken soon.

“If you don’t move quickly when the crisis is fresh in mind, you may not move at all,” he said.

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The Bank of England plans to spend the remainder of its 175 billion-pound ($278 billion) bond- purchase program as officials seek to drive home the economy’s recovery.

The Monetary Policy Committee, led by Governor Mervyn King, kept the target for its plan unchanged today, as predicted by all 42 economists in a Bloomberg News survey. The central bank also maintained the benchmark interest rate at a record low of 0.5 percent.

Policy makers will use new forecasts next month to appraise the plan, which prompted a split on the committee in August when King favored spending even more. Former Deputy Governor John Gieve said in an Oct. 6 interview that officials may consider an expansion in November because they will be wary of a “false dawn” for the economy.

“We’re heading to a recovery of sorts, but unemployment is still rising and bearing down on inflation,” said Alan Clarke, an economist at BNP Paribas SA in London. “There’s still a case for more purchases, and I think they will do more in November.”

The pound rose against the dollar after the decision. The U.K. currency was at $1.6071 as of 12:48 p.m. in London, from $1.5969 yesterday.

The European Central Bank today kept its benchmark interest rate at a record low of 1 percent, as predicted by all 53 economists in a Bloomberg News survey. The U.S. Federal Reserve held its target rate at close to zero on Sept. 23.

Election Approach

Prime Minister Gordon Brown is trying to revive Britain’s economy in time for an election which he must call by June 2010. His ruling Labour Party fell to third place for the first time since 1982 in an opinion poll finished on Sept. 27.

There are signs that the economy is picking up in the U.K. and around the world. Australia’s central bank on Oct. 6 became the first Group of 20 nation to raise interest rates since the start of the global financial crisis.

U.K. House prices rose 1.6 percent in September, a third consecutive gain, Halifax said on Oct. 6. Services industries expanded at the fastest pace in two years and consumer confidence rose the most since 1995, reports have shown.

At their Sept. 10 decision, policy makers said rising asset prices could create a “virtuous upward spiral” for the economy. Chief Economist Spencer Dale said last month that he favored limiting the increase in so-called quantitative easing to 175 billion pounds because of the risk spending more might stoke asset prices too much.

King’s Vote

King had favored a bigger increase in the program to 200 billion pounds as the bank’s predictions showed inflation may not return to the 2 percent target in two years. He and policy maker David Miles, who had sided with King, opted for consensus on the nine-member panel at the September meeting, while saying a bigger increase could still be justified.

The bank has so far bought more than 160 billion pounds of government and company bonds and has pledged to spend the remainder of its plan by November.

Miles said Sept pay day loan lenders. 30 that the bond purchases are “having an impact that is relevant to economic conditions right across the country.” The yield on the 10-year U.K. government bond was 3.39 percent today, compared with 3.64 percent on March 4, the day before quantitative easing started.

Weakness Persisting

The economy has shown some signs of persisting weakness. Manufacturing unexpectedly dropped in August to the lowest level since 1992, the inflation rate has fallen to the lowest since January 2005 and unemployment is at its highest in 14 years. British Airways Plc, Europe’s third-biggest airline, said Oct. 6 that 1,000 flight attendants have agreed to voluntary job cuts.

“The main risk, short term, is that everyone thinks the recovery is over, we tighten too quickly, and we see a sort of ‘W’ emerge,” Gieve said. “The manufacturing figures are a reminder that it’s too early to say it’s definitely over” and extending the asset-purchase plan next month “will be an option they’ll look at pretty closely,” he said.

David Blanchflower, a former policy maker who left in May, said the bank should expand its bond plan and also cut the rate it remunerates commercial bank reserves. Blanchflower tended to favor lower rates than his colleagues, and in three years on the panel, he voted for a reduction 19 times, favored no change on 16 occasions and wanted an increase only once.

‘Big Meeting’

“They’ve got to do more,” Blanchflower told Bloomberg Television today. “November will be a big meeting, and I suspect they’re going to do some more. The discount rate, remuneration on reserves may well be something that they can cut. Certainly, there’s thinking about more quantitative easing, and I suspect there’s still a thought about the possibility that 0.5 percent rate could come down further.”

Bank lending is also still constrained as institutions repair balance sheets damaged in the financial crisis. Lloyds Banking Group Plc said today that it will keep its options open after the Financial Times said the lender is preparing to raise 15 billion pounds in a share sale.

Britons cut consumer debt for a second month in August, repaying a net 309 million pounds, the most since April 1993. The average interest rate on mortgages fixed for two years was 4.42 percent in August, compared with 3.98 percent in March when the bank started quantitative easing.

Minutes of today’s deliberations will be released on Oct. 21. The next decision is due on Nov. 5 and the bank will publish its new quarterly forecasts a week later.

“This meeting is a holding position until we get to November,” said Colin Ellis, an economist at Daiwa Securities SMBC and a former central bank official. “If I were on the committee, I’d increase quantitative easing, but it’s a difficult decision.”

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Royal Bank of Scotland Group Plc posed such a threat to the British and global financial systems at the height of the crisis last year that Prime Minister Gordon Brown could have ended up fully seizing the bank, former Bank of England official John Gieve said.

Brown didn’t need to go that far because Fred Goodwin, then RBS chief executive officer, conceded to government rescue aid on the weekend of Oct. 11-12, Gieve said. Other officials were scrambling from London to Washington and Paris at the time to coordinate the response to the panic sparked by Lehman Brothers Holdings Inc.’s collapse four weeks earlier.

“If Royal Bank of Scotland hadn’t been propped up as it was, in practice it would have been nationalized the following week,” Gieve, who was the bank’s deputy governor at the time of the 2008 crisis, said in a Bloomberg Television interview yesterday. “If RBS, HBOS, Lloyds had gone down, that would have had huge contagious effects throughout the rest of the world.”

Brown’s government took stakes in RBS, Europe’s biggest bank by assets at the time, and Lloyds Banking Group Plc, the bank formed in the merger of Lloyds TSB Group Plc and HBOS Plc, as the financial crisis intensified. Gieve said some bank chiefs resisted aid before realizing that “the game was up” and accepting the full rescue package unveiled on Oct. 13, 2008.

‘Crashing’ Dreams

“For the boards and chief executives, particularly of RBS and HBOS, this was a terrible day,” Gieve said. “All their dreams were crashing to the ground, but there wasn’t a great deal of arguing. In truth, both RBS and HBOS knew they needed government support and they were being told the terms they had to accept.”

Goodwin and Andy Hornby, who was chief executive officer of HBOS, then resigned as their banks ceded majority control to Brown’s government. HBOS, the country’s biggest mortgage lender at the time, is based in Edinburgh, as is RBS.

The two banks were not “confident they could get to the end of the day,” on Oct. 6 and Oct. 7, 2008, Bank of England Governor Mervyn King told the BBC in an interview broadcast last month. On Oct. 8, the government offered to take stakes in British banks to shore up their capital.

Gieve said that he spent much of the following weekend in negotiations with the banks, the U.K. Treasury and the Financial Services Authority to prepare the rescue package.

The talks took place amid an “intensive diplomatic effort” to press for other governments to recapitalize their banks, Gieve said. Alistair Darling, the finance minister, was with King at the International Monetary Fund meetings in Washington and Brown was in Paris to discuss the crisis with European Union leaders.

‘We Pulled it Off’

“This was something that has never been done before, an attempt to recapitalize the heart of the British banking system in two days flat, and at the same time persuade the rest of the world and the rest of Europe that this was the model which they should adopt,” Gieve said. “We pulled it off.”

The deal wasn’t perfect and had to be tweaked in January to adjust the terms of the RBS bailout, Gieve said. The government now owns stakes of 70 percent in RBS and 43 percent in Lloyds Banking Group.

“We had to convince the markets that this was enough, that they didn’t need to worry that any of these banks were going to fail,” he said. “It did that trick. It was a reestablishment of confidence that was key, not the actual fine print of the numbers.”

Gieve, who left the central bank at the end of February, also participated in the global coordinated interest-rate cut on Oct. 8, 2008.

‘Real Tsunami’

“The coordinated cut wasn’t as important as the recapitalization of the banks,” he said. “Everyone was focused on the fact there was a real risk of total financial meltdown, and a real risk of another Great Depression. In the summer, we’d been in a storm which was severe. We were now facing a real tsunami which could sweep away all we’d worked for, for years.”

Asked to identify his biggest mistakes during the three years he spent as deputy governor, Gieve said that he wished he had spoken out more about the risks to the financial system before the crisis. He also said that interest rates should have been higher in the U.K. from 2005.

“We did identify vulnerabilities in the financial system in 2006, including things like wholesale funding exposure and so on,” Gieve, 59, said. “But we didn’t make enough noise about them. Personally, I just wish that I’d beaten the drum a bit more than I did.”

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Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty said other countries must make more of an effort to stabilize the world economy after Canada has done its part.

Carney said imbalances that world leaders have identified as threats to a global recovery are between countries like the U.S. that run large trade deficits and surplus countries like China. Flaherty said Asian countries must allow their currencies to float more freely.

“There is no question about Canada’s contribution already to this effort and the real issues lie elsewhere,” Carney said in an interview in Istanbul, where he attended a meeting of G-7 officials with Flaherty.

The G-7 repeated its statement that “excessive volatility and disorderly movements” in exchange rates threaten the global recovery. While the statement did not single out the U.S. dollar, it came at the end of a week in which policy makers from Canada to France said a sliding dollar risks impeding their recoveries from the deepest global recession since World War II.

The U.S. dollar has dropped 14 percent against the Canadian dollar over the past six months. The Canadian currency strengthened 0.8 percent to C$1.0716 per U.S. dollar at 1:27 p.m. in Toronto, from C$1.0802 on Oct. 2.

Canada, which had a three-decade run of trade surpluses until last December, has posted record deficits this year amid slumping sales to U.S. On arriving to Istanbul, Flaherty said he was concerned about the U.S. dollar’s weakness.

Policy Changes

Carney said a rebalancing of global growth will require the narrowing of the “orders of magnitude” of current account surpluses and deficits through changes in macroeconomic, structural and exchange rate policies in some countries.

“Some of those shifts in policies have begun,” Carney said, adding that rebalancing of the global economy “will also take a shift in relative exchange rates.”

Carney declined to say whether the reference to excessive volatility in the G-7 statement was a reference to the U.S. dollar.

“We’ve seen tremendous volatility over the last year. I think anybody who is active in the currency market would confirm that,” Carney said. “We’ve seen tremendous volatility across a range of major currencies.”

Carney told reporters on Oct. 3 the G-7 statement should be seen in the context of encouraging sustainable global growth.

Major Imbalances

Asked in yesterday’s interview whether Canadians would need to endure an even stronger currency to help correct global imbalances, Carney said: “The major imbalances are not between the U.S. and Canada, they are between major deficit countries, which include the United States, and major surplus countries, such as China.”

The lack of flexibility in some Asian currencies “creates imbalances, it creates distortions in the world marketplace and that’s what we are trying to avoid,” Flaherty said. “If we are going to have our currencies as market currencies then we all need to have our currencies fluctuate.”

Carney repeated concern that the strong Canadian dollar is a risk to the bank’s inflation forecast. He said the bank looks at currency movements in the context of their effects on inflation, saying the currency “is a downside risk to inflation, which is why we mention it.”

Recent strength in the dollar reflects higher commodity prices and “generalized weakening” of the U.S. dollar, Carney said in a speech last week, without saying how much each factor contributed. Bank of Canada officials have said in the past the bank may use monetary policy to counter movements in the currency not related to Canada’s economic fundamentals.

Carney also commented yesterday on data last week that showed the country’s economy unexpectedly stalled in July and U.S. job losses unexpectedly accelerated as “consistent with the expected unevenness of the recovery.”

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South Korea still needs expansionary economic policy and the central bank has other tools available before raising interest rates if it decides it needs to contain rising asset prices, Finance Minister Yoon Jeung Hyun said.

Any winding back of fiscal stimulus by the government or interest rate increases from the Bank of Korea would be “premature” because the economy still faces uncertainties, Yoon said in an interview yesterday in Istanbul, where he is attending the annual meetings of the World Bank and the International Monetary Fund.

Leaders from the Group of 20 nations last month pledged to preserve the global economic recovery and wait to pull back emergency government assistance until “the time is right.” South Korea’s government allocated extra spending and frontloaded the budget earlier this year in response to the crisis while the central bank cut interest rates to a record low.

“This is not the time to implement exit strategies because there are many obstacles to overcome to reach a robust recovery,” Yoon, 63, said. “Private sector demand and investment hasn’t yet recovered fully because of the global crisis in the past year. We have some way to go.’

Central bank Governor Lee Seong Tae last month signaled borrowing costs may be raised to stem rising property prices and mortgage lending. The central bank kept its key rate unchanged at 2 percent for a seventh month on Sept. 10. Policy makers next meet on Oct. 9.

South Korea’s inflation rate was 2.2 percent in September, remaining below the central bank’s target of between 2.5 percent and 3.5 percent for a fourth month.

“We don’t have problems with inflation,” Yoon said.

Asset Prices

The decline in borrowing costs has fueled consumer credit, with bank lending to households expanding for a seventh straight month in August, led by demand for mortgages. Home prices climbed for a fifth month in August.

Asset prices are on a course to “normalize” after hitting a bottom during the financial crisis, Yoon said, adding that the gains are “not a serious” problem.

“For South Korea, the central bank has a lot of tools before raising the interest rate” if it chooses to unwind monetary policy, Yoon said payday loan. “The interest rate is decided by the Bank of Korea and we believe they will judge it wisely and consider every index comprehensively.”

President Lee Myung Bak said Sept. 30 the government needs to continue its expansionary fiscal policy until signs of an economic recovery are stronger. The government on Sept. 28 announced a proposal to increase next year’s spending by 2.5 percent to help sustain economic growth.

‘Cautiously Optimistic’

South Korea is one of the fastest nations in the region to recover from the crisis as the economy expanded 2.6 percent in the second quarter, the quickest pace since 2003. The International Monetary Fund on Oct. 1 raised its economic growth forecast for South Korea, saying the economy will contract a less-than-expected 1 percent this year.

“We are cautious and cautiously optimistic because we still have many uncertainties in the economic sector,” Yoon said. “We still need expansionary macroeconomic policies.”

Exports fell at the slowest pace in 11 months in September, helped by increased overseas sales of cars and semiconductors while manufacturers’ confidence was at a two-year high.

Gains in the won, Asia’s best-performing currency against the dollar last quarter, boosted concern the government will intervene to minimize the impact of a stronger exchange rate on exporters. It climbed more than 8 percent in the three months ended September and reached the strongest in a year on Oct. 1.

Smooth Volatility

The currency appreciation is not hurting the nation’s exports and the government will take steps to smooth exchange- rate volatility and guard against speculative trades, Yoon said.

The government will use market operations to smooth any volatility in the currency, similar to policy makers in other countries, “particularly if there are signs of speculation,” Yoon said.

“Korea’s exports situation is much better than other countries,” he said. “The exchange rate hasn’t impeded exports because of the quality of products and marketing. We respect the market’s view” on what the level of the currency should be.

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Group of Seven finance officials meet this weekend in Istanbul debating whether to surrender the weapon that helped shape currency markets for three decades.

One week after the G-20 anointed itself the world economy’s main policy forum, G-7 finance ministers and central bankers may break with tradition and choose not to release a statement on the global economy and currencies, said officials who declined to be identified. That would deprive traders of the commentary that policy makers frequently use to influence exchange rates.

The debate over the G-7’s role comes as European Central Bank President Jean-Claude Trichet and Bank of Canada Governor Mark Carney signal concern about the U.S. dollar’s slide over the past seven months and Japan’s new government struggles to find a clear line on the yen. The diversity of the G-20, which includes China and India, means investors may have to deal with conflicting signals as its members seek common ground.

“There may be communication difficulties as policy makers misspeak and inject volatility into markets,” said Stephen Jen, a managing director at BlueGold Capital Management LLP in London. “It will take a few rounds of G-7 and G-20 meetings to form a collective opinion on currencies.”

The euro fell against the dollar yesterday after Trichet said “disorderly movements” in exchange rates have “adverse implicate ons” for economies. The euro fell as much as 0.9 percent to $1.3148. It has gained 16 percent since March.

Officials gather tomorrow, one week after President Barack Obama and other G-20 leaders left Pittsburgh pledging to work together to narrow so-called imbalances such as the U.S. trade deficit and China’s current account surplus.

New Arena

“They clearly believe the G-20 will be the appropriate place to discuss currency,” said Simon Derrick, chief currency strategist at BNY Mellon Corp.

The embrace of the G-20 reflects China’s increased role in the global economy and the view that its policy of managing the yuan’s value against a basket of currencies means its opinions cannot be ignored

“Only the G-20 can say anything meaningful about currencies because the big policy issue is the dollar-China peg,” said Bilal Hafeez, Deutsche Bank AG’s London-based head of foreign-exchange strategy. China has kept the yuan little changed against the dollar for more than a year.

The biggest industrial nations first started to meet regularly in the 1970s after the Bretton Woods currency framework that had governed the global economy since World War II collapsed.

Their power to steer currencies reached its pinnacle in the 1980s when five of its members signed the Plaza Accord to weaken the dollar. The Louvre Accord was introduced two years later to buoy it. In September 2000, the G-7 rescued the euro — the last time it intervened.

Currency Study

Three years later in Dubai it started to lobby China to allow the yuan to appreciate with a call for “more flexibility in exchange rates.”

A study last year by ECB economist Marcel Fratzcher found the G-7 was successful in moving currencies on 80 percent of the 29 occasions it tried to do so since 1975 within a year.

“G-7 currency statements were not always effective straight away, but there have been times when they have signalled clear preferences,” said Thomas Stolper, a currency strategist at Goldman Sachs Group Inc. in London.

This time, balancing the world economy will likely weaken currencies such as the dollar and sterling, while boosting the euro and yuan, whose economies are export-led, said Marco Annunziata, chief economist at UniCredit Group in London.

That may concern some in the G-7 as the dollar’s 13 percent slide against a basket of seven currencies since the start of March impedes their recovery by making exports more expensive.

‘Major Risk’

Carney said Sept. 28 that the Canadian dollar’s gain was a “major risk” and Trichet said the same day that a strong dollar is “extremely important” for the world economy. Japanese Finance Minister Hirohisa Fujii said Sept. 29 the government may act to stabilize the foreign-exchange market and denied that he supported a stronger yen.

“There is definitely rising concern about currencies as we’re at a delicate moment for economies,” said Annunziata.

While the dollar’s slide may buoy the U.S. economy by easing lopsided flows in trade and investment, World Bank President Robert Zoellick this week became the latest official to question its role as the world’s only reserve currency. Such speculation could undermine the U.S.’s ability to draw the foreign finance it needs to fund its $11.8 trillion debt.

Federal Reserve Chairman Ben S. Bernanke yesterday countered that there’s “no immediate risk” to the dollar.

The trend away from the G-7 has been building since it stopped backing up its talk with money, said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Connecticut. It took almost two years for China to heed the request for more currency flexibility.

“I have a G-7 bias, I was weaned on currency accords,” said Gilmore. “On G-7 weekends now I go fishing.”

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The European Central Bank will lend banks less money than economists forecast in its second 12-month auction of unlimited funds, indicating banks’ need for cash has eased for now.

Banks bid for 75.2 billion euros ($110 billion) at the current benchmark interest rate of 1 percent, the Frankfurt- based ECB said today. It loaned a record 442 billion euros at the first auction in June and economists had forecast demand for 137.5 billion euros this month, according to the median of 16 estimates in a Bloomberg News survey.

“That it came that low is a bit of a surprise,” said Jan Misch, a money-market trader at Landesbank Baden-Wuerttemberg in Stuttgart. “However, even expectations for anything beyond 100 billion were exaggerated in the first place. There isn’t just any major need for liquidity.”

The ECB, which will offer banks 12-month loans for a third time on Dec. 15, is flooding the system with money in the hope it will be lent on to companies and households. Money-market rates have dropped as the economy shows signs of emerging from recession and banks become less wary of lending to each other.

ECB Governing Council member Marko Kranjec said the demand “shows the system is liquid enough and that banks don’t need funds so much.”

The euro extended its advance against the dollar after the announcement and was up 0.6 percent to 1.4668 as of 12:27 p.m. in London.

‘Encouraging’

The ECB filled all bids in the auction. It said the 589 banks that participated, which compares with 1,121 in June, will receive the funds tomorrow.

“Weaker demand for ECB loans probably reflects the fact that banks feel more able to borrow from each other, which is encouraging,” said Jennifer McKeown, an economist at Capital Economists Ltd. in London. Still with banks “still concerned about further losses to come, there is a good chance that they will hoard the funds rather than lending them to firms and consumers.”

The Eonia overnight rate, the rate European banks charge each other for overnight loans, has declined to 0.35 percent from 2.2 percent at the start of the year. The euro interbank offered rate, or Euribor, for three-month loans this week fell to a record low of 0.74 percent from 5.24 percent a year ago.

‘Underpin Recovery’

In October last year, the ECB began lending banks as much money as they wanted for up to six months, effectively assuming the role of the money market. In May this year, it announced it would extend the maximum maturity on its loans to 12 months.

While the ECB has retained the option of raising the rate it charges banks for the loans, President Jean-Claude Trichet said the September 12-month tender would be held at the benchmark rate. That should “promote the extension of credit to the euro-area economy and, therefore, further underpin its recovery,” he said on Sept. 3.

“The ECB’s commitment to keep the liquidity support in place is crucial for all players, because it reassures banks that long-term liquidity will remain readily available even in case of further unforeseen shocks,” said Marco Annunziata, Unicredit Group’s London-based chief economist.

The ECB expects the euro-area economy to grow 0.2 percent in 2010 after contracting 4.1 percent this year. The region probably emerged from recession this quarter, according to the European Commission.

ECB policy makers remain cautious.

“There is no need to rush to exit from monetary stimulus” and “no reason to change the monetary policy stance” at the moment, ECB council member Erkki Liikanen said yesterday.

European consumer prices fell more than economists forecast in September, declining 0.3 percent from a year earlier, a report today showed. Bank lending to euro-area households grew at the slowest annual rate on record in August, the ECB said Sept. 25.

On Sept. 28, Trichet urged banks to step up lending to the real economy. “Our message to banks is clear: do your job,” he said.

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