/ 27 January 2009

Japan to rescue troubled companies

Japan plans to use public money to help the companies hardest hit by the financial crisis, while newly confirmed United States Treasury Secretary Timothy Geithner vowed to act swiftly to rescue the US economy.

Japan, like many other nations, has already committed funds to help banks and spur lending to cash-starved businesses and consumers, but the new plan extends the assistance to others caught in the credit squeeze.

The new initiative comes after Geithner and US President Barack Obama assured lawmakers and markets that they would immediately get to work to protect the economy from the worst financial crisis since the Great Depression.

German corporate sentiment likely deteriorated to a fresh post-reunification low in January, data is expected to show later on Tuesday, due to weakening demand and production cuts.

The Munich-based Ifo economic thinktank’s business climate index, based on a monthly poll of about 7 000 firms, probably fell to 81,3 in January from 82,6 in December, a Reuters poll of 50 economists showed. Such a low reading has not been seen since German reunification in 1990.

As expected, Japan’s biggest broker, Nomura announced its fourth straight quarterly loss, suffering a net loss of 343-billion yen ($3,8-billion) in the October to December period as the cost of buying some of Lehman Brothers’ business eroded earnings.

But the government fund injection plan helped Tokyo shares extend their gains, with the Nikkei average closing up 4,9% at 8 061,07, its biggest one-day gain in six weeks.

The dollar and euro also rose against the yen.

To qualify for the funds, firms must have plans to boost profitability within three years and the offer would last while market turmoil hampered fund raising, METI said.

The world’s second-biggest economy is now struggling with its first recession in seven years. Japanese exports plunged in December by more than a third from previous-year levels and business sentiment has slumped to a record low.

Market players gave the plan a wary welcome, although some scented a whiff of election-year politicking at work.

”In light of the looming election, the government needs to help companies that are bleeding losses,” said Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo.

Unpopular Prime Minister Taro Aso’s ruling bloc is in danger of losing an election that must be held by October.

The government will inject the funds by buying shares, and no industries will be ruled out for injections, the ministry said.

Governments around the world have spent hundreds of billions of dollars on bank bailouts and fiscal stimulus, while central banks have slashed interest rates to record lows to address the crisis set off by the US housing slump.

But in a sign that policymakers were running out of options, Bank of Japan minutes showed on Tuesday that most of its policy board members thought its key interest rate of 0,1% was the lowest possible level allowing money markets to function.

With many Asian markets closed for the Lunar New Year, Tokyo stocks rose, building on cautious gains on Wall Street, where some rare positive news helped brighten the mood after a wave of layoffs swept the world on Monday.

No 1 drug maker Pfizer said it planned to buy rival Wyeth for $68-billion, Barclays said it had no need to raise capital, and sales of existing US homes unexpectedly rose 6,5%.

Geithner to act swiftly
In Mumbai, India’s central bank left its key short-term interest rates unchanged at a policy review on Tuesday so as to assess the impact of its recent aggressive easings, but cut its growth forecast for the fiscal year ending in March.

Faced with a full-blown crisis, US senators largely set aside misgivings about Treasury Secretary Geithner’s failure to pay some taxes earlier this decade in light of his experience in battling the financial storm as head of the New York Federal Reserve Bank, a post he relinquished on Monday.

He will be replaced by William Dudley, the head of the New York Fed’s markets group, a source familiar with the decision told Reuters.

”We are at a moment of maximum challenge for our economy and our country,” Geithner said as he was sworn into office shortly after the Senate approved him on a 60-34 vote.

He will immediately start work on a huge overhaul of the $700-billion US financial rescue programme and is expected to propose new steps to unclog credit markets in the next two weeks.

The new administration, which is already pushing Congress to approve an $825-billion economic stimulus package, may need to go back to lawmakers to ask for more funds to clean up the banking system, possibly through the creation of a government-run ”bad bank” to soak up distressed assets. – Reuters