Financial thoughts

This is Japan’s “Sputnik moment.”

This phrase recalling how the Soviet Union’s 1957 space launch shocked the U.S. is back in vogue thanks to President Barack Obama’s State of the Union address this week. He sees the rise of India and China as a catalyst for the U.S. to boost its competitive game, and it’s hard to argue with that.

If any economy needs such a jolt, it’s Japan. News last year that China’s gross domestic product surpassed Japan’s, knocking it into the No. 3 spot, wasn’t quite it. Yet what about relegating wealthy Japan to the same level of creditworthiness as China’s still relatively poor population?

Standard & Poor’s did just that yesterday, and Prime Minister Naoto Kan can’t be happy. This is a wakeup call like few others for a government that has been comatose since S&P’s last downgrade in 2002. Will it take the hint and rein in a public debt hurtling toward the 1 quadrillion yen ($12 trillion) mark? I wish I could be more optimistic.

The odds don’t favor Japan responding with fiscal austerity. The problem is political will, of which there is all too little.

The irony is that Kan is Mr. Debt Reduction — Japan’s answer to Robert Rubin, even. Before becoming the third Japanese leader since Obama took office, Kan was finance minister. He’s never been reticent to talk about a Greece-like Japanese debt crisis and is even pushing for a tax increase to trim debt, just as Rubin did as a member of the Clinton administration in the 1990s. S&P is saying bold action is needed.

‘Sanity Check’

“This move is a welcome sanity check that there remain structural debt and deficit issues to deal with,” says Callum Henderson, global head of foreign-exchange research at Standard Chartered Plc in Singapore.

The trouble is, Kan is politically wounded with approval ratings in the mid-20 percent range. He’s fighting to keep his job, never mind rally lawmakers to tackle the world’s largest debt. Kan’s battle to raise consumption taxes to prevent a crisis like Europe’s would be an uphill one if he were beloved.

Japan doesn’t have the luxury of time. It’s graying rapidly and the birthrate has been shrinking for years. Already, 23 percent of Japan’s 126 million people are over 65, while 12 percent are under 15, which is almost the mirror image of U.S. demographics. As the working-age population dwindles, Japan’s tax base will plunge as its debt-servicing costs skyrocket.

That’s why I think S&P’s move to cut Japan’s credit to AA- from AA is a bit behind the curve. Japan is on a dangerous trajectory. It avoids crises because it has roughly $15 trillion of household savings and about 95 percent of public debt is held domestically. There’s little risk of the kind of capital flight to which Ireland and Portugal are vulnerable.

When Yields Rise

Yet Japan’s national balance sheet is getting more and more out of whack. It’s only a matter of time before speculators begin attacking it, George Soros-style. S&P’s action, and the likelihood of more to come, should be a call to hedge funds to try their luck.

Ten-year debt yields, after all, are irrationally low at about 1.2 percent. Once yields begin edging higher, government borrowing costs will rise exponentially and banks, pension funds, insurance companies and households — everyone, basically — will experience massive investment losses.

For 20 years now, one of the biggest questions for market timers has been when, oh when, might Japan fully recover from its crash in 1989? It never seems to happen. Deflationary Japan doesn’t plumb the depths of 1930s America, but neither does it manage to expand faster than 1 percent for very long.

Trapped Central Bank

Something bulls fail to consider when Japan is growing is why. It’s because of zero interest rates, massive borrowing and efforts to weaken the yen, not economic dynamism. That formula is losing its potency. When Federal Reserve officials begin floating trial balloons about higher borrowing costs, the Bank of Japan will still be trapped. No serious economist sees the BOJ raising rates markedly in the next five or even 10 years.

In fact, Bank of Japan Governor Masaaki Shirakawa will come under greater pressure to pump more liquidity into the banking system and buy huge chunks of government debt. It won’t help. Japanese monetary policy has been pushing on a string for more than a decade now, achieving little to boost growth.

That won’t stop politicians from calling on the central bank to do more, and that’s just the point. Elected officials don’t want to tell Japanese voters to tighten their belts, nor are the current crop of legislators wired to implement bold reforms.

I hope I am wrong, and that this Sputnik moment thrusts Tokyo into action. It’s more likely that Japan will try to muddle along for a few more years. That would be a grave mistake.

Japan can no longer use its past performance to distract investors’ attention from where it’s ultimately heading. Credit raters won’t fall for that trick again. Neither will hedge funds.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

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ST. LOUIS 

Visa Inc. and MasterCard Inc. may face permanent damage to the fastest-growing part of their business after the Federal Reserve proposed rules that could cut debit-card transaction fees by 84 percent.

“It is negative all around,” wrote Scott Valentin, an analyst at FBR Capital Markets, in a note to clients. “This significantly impacts the business model for the networks.”

Visa and MasterCard, the world’s biggest payment networks, plunged more than 10 percent in New York trading Thursday after the Fed proposed capping so-called interchange fees at 12 cents each. Currently, the networks charge merchants an average of 1 percent of the purchase, regardless of cost, and pass that money to banks that issue cards.

The change, if approved, would wipe out most of the $16.2 billion in revenue that debit cards generated last year for U.S. lenders, including Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co.

Debit cards have become an increasingly popular substitute for cash as credit card issuers cut off accounts and curbed lending amid the financial crisis and recession.

U.S. consumer spending with debit cards climbed 8 percent last year to $1.45 trillion, while credit purchases plunged 10 percent, according to the Nilson Report.

The average debit interchange fee last year was 44 cents per transaction, or 1.14 percent of the purchase price, according to a draft of the proposed rules. The Fed staff outlined plans that recommend setting interchange at 7 cents or 12 cents, a reduction of 73 percent to 84 percent payday loans lenders. Initial Wall Street estimates Thursday pegged the cut as high as 90 percent.

The proposed reductions would align U.S. interchange rates more closely with other countries, including Australia and the 27 nations of the European Union. Visa Europe Ltd., operator of the Continent’s biggest payments network, agreed to cut the fees to 0.2 percent as part of a deal to end EU antitrust action, the European Commission said last week. MasterCard agreed to the same rate last year.

Mastercard Worldwide said in a statement that the proposed cap would shift merchant costs directly to consumers.

“Experience demonstrates that consumers, not banks or payment networks are the biggest losers as a result of this regulation,” said Noah Hanft, MasterCard’s general counsel. “This type of price controls is misguided and anti-competitive, and in the end is harmful to consumers.”

The headquarters for MasterCard’s Global Technology and Operations division is in O’Fallon, Mo. Jim Issokson, a Mastercard spokesman, said that since the changes would mostly affect consumers, that facility would not be affected if the change goes through. MasterCard officials say approximately 1,800 people are employed there.

Visa, which derives about 20 percent of its revenue from U.S. debit, said the rules would create “unintended consequences” for the industry and consumers.

Kavita Kumar of the Post-Dispatch contributed to this report

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South African inflation accelerated for a second month in November as gasoline costs increased, while remaining inside the central bank’s 3 percent to 6 percent target range.

The inflation rate rose to 3.6 percent from 3.4 percent in October, the Pretoria-based statistics office said on its website today. The median estimate of 18 economists surveyed by Bloomberg was 3.5 percent. Prices rose 0.2 percent in the month.

The government increased gasoline prices by 2.5 percent on Nov. 3 as crude oil climbed above $80 a barrel. The rand’s 12 percent rally against the dollar in the past six months has helped to offset price pressures, keeping inflation inside the central bank’s target band and enabling Governor Gill Marcus to cut the benchmark interest rate three times this year to 5.5 percent.

“Inflation will probably average 4.5 percent next year and accelerate a bit faster in 2012,” said Jean-Francois Mercier, an economist at Citigroup Inc. in Johannesburg. “I wouldn’t be too worried about inflation, not where the rand is at the moment. We don’t see any further rate cuts no fax cash loans.”

The rand was at 6.8386 against the dollar as of 11:50 a.m. in Johannesburg, little changed from 6.8360 before the data was released. The yield on the R157 government bond, due 2015, was unchanged at 7.36 percent.

Marcus said on Nov. 18 that inflation will probably average 4.3 percent this year and next. The bank has cut the key rate by 6.5 percentage points since December 2008 to help pull the economy out of recession.

Growth in Africa’s biggest economy is still subdued, easing pressure on inflation. Gross domestic product rose an annualized 2.6 percent in the third quarter, down from 2.8 percent in the previous three months, the statistics office said on Nov. 23.

“The recovery has been fragile, with disappointing growth,” Marcus said at the bank’s annual general meeting on Dec. 8. Private sector investment is still “extremely subdued,” she said.

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European inflation accelerated to the fastest in almost two years in October, led by surging energy costs.

Euro-area consumer prices rose 1.9 percent from a year earlier after increasing 1.8 percent in September, the European Union statistics office in Luxembourg said today. That’s the fastest since November 2008 and in line with an estimate published on Oct. 29. Energy prices rose 8.5 percent in October from a year earlier, the biggest gain since May.

Crude-oil prices have jumped 12 percent over the past two months just as growth in the region’s economy weakened. The European Central Bank, which has kept borrowing costs at a record low and provided banks with emergency liquidity, forecast on Nov. 4 that inflation will remain “moderate.”

“It’s purely oil-driven,” said Christoph Weil, an economist at Commerzbank AG in Frankfurt. “Underlying inflation pressures will remain very subdued overall into 2011.”

The euro was little changed against the dollar after the data, trading at $1.3602 at 10:03 a.m. in London, up 0.1 percent on the day.

Rising energy costs are leaving companies and consumers with less money to spend, threatening to deepen the region’s slowdown. Europe’s services industry expanded at a weaker pace last month and unemployment remained at the highest in more than 12 years in September. German investor confidence dropped.

Cosmetics Maker

Beiersdorf AG, the German maker of Nivea skin creams, on Nov. 4 reported third-quarter profit that missed analyst estimates and lowered its earnings forecast. L’Oreal SA, the world’s largest cosmetics maker, said last month that Western European sales lagged behind revenue in other markets.

The ECB, which aims to keep annual gains in consumer prices just below 2 percent, forecasts that “inflationary pressures over the medium term” will remain “contained,” President Jean-Claude Trichet said on Nov. 4. The central bank said on Nov. 11 that its latest survey of professional forecasters sees inflation averaging 1.5 percent this year and next before reaching 1.6 percent in 2012.

Core inflation, which excludes volatile costs such as energy prices, quickened to 1.1 percent from 1 percent in the prior month.

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Federal Reserve Chairman Ben Bernanke said Monday that a federal agency review of foreclosure procedures at the nation’s largest mortgage servicers should be completed next month.

"We take violations of proper procedures seriously," Bernanke said in remarks prepared for delivery at a joint conference in Arlington, Va., with the Federal Deposit Insurance Corp. on Wall Street’s foreclosure procedures.

"I would like to note that we have been concerned about reported irregularities in foreclosure practices at a number of large financial institutions," Bernanke said. "The federal banking agencies are working together to complete an in-depth review of practices at the largest mortgaging servicing operations."

"We are looking intensively at the firms’ policies, procedures and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures," he said.

Bernanke also highlighted the precarious state of the housing market.

"Now, more than 20% of borrowers owe more than their home is worth and an additional 33% have equity cushions of 10% or less, putting them at risk should house prices decline much further," he said. "With housing markets still weak, high levels of mortgage distress may well persist for some time to come."

Bernanke said the conference will also focus on results from the ongoing program by the Federal Reserve Bank called the Mortgage Outreach and Research Effort, or MORE.

The Federal Reserve chairman detailed various efforts by the MORE program to help beleaguered homeowners. These include an online tool allowing homeowners to file unemployment insurance benefits as income to quality for federal mortgage modification programs.

Bernanke said that more details of the MORE program can be accessed at the Federal Reserve Bank of Chicago’s website. 

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Baylor College of Medicine is on a mission to streamline its administrative staff.

The medical institution, which has struggled financially for years, announced to employees Thursday in an internal memorandum that it would cut jobs and review administrative salaries and benefits.

Dr. Paul Klotman, who took over as president on Sept. 1, noted in the memo that the payroll for Baylor’s 1,440 administrative positions totals $118 million a year in salary and benefit expense.

“I believe that when we look at these positions, we will find that there is duplication of efforts within and across departments,” he wrote.

Describing the new initiative as “rightsizing,” rather than downsizing, Klotman said Baylor will embark on an initiative to cut certain positions, combine others and have shared positions across departments.

The goal is to save $15 million to $20 million a year as a result.

“This will be a major step forward towards my goal of restoring the original contribution levels to the college’s retirement plan,” he added payday loans lenders.

Baylor also will implement new discretionary spending policies as part of its process improvement.

Lori Williams, a Baylor spokeswoman, said Klotman would not comment further on the memo and could not provide any more specifics.

St. Luke’s Episcopal Hospital became the primary, private adult-teaching hospital for Baylor in April 2004 after Baylor ended its 50-year affiliation with The Methodist Hospital. In 2005, Baylor and St. Luke’s opened the doors to the Baylor Clinic at 6620 Main

In June 2005, St. Luke’s and Baylor announced plans to merge, only to call off the deal three months later — around the same time Baylor and Methodist announced a renewed, redefined collaboration at the urging of Texas Attorney General Greg Abbott.

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Smurfit-Stone Container Corp. is one of several paper-making companies named in an antitrust suit filed by a Minnesota company that accuses its rivals of fixing the prices on containerboard.

Kleen Products LLC filed the lawsuit Thursday in federal court in Chicago, alleging that Smurfit-Stone and others in 2005 “began a coordinated across-the-board imposition of capacity restraints, leading to a subsequent restriction in the supply of containerboard products on the market. The goal of the conspiracy was to fix, raise, maintain and stabilize the price at which containerboard products were sold.”

Minnetonka, Minn.-based Kleen Products also named Weyerhaeuser Co guaranteed personal loan approval.; Packaging Corporation of America; International Paper; Norampac Industries Inc.; Cascades Inc.; Domtar Corp.; Georgia Pacific LLC; and Temple-Inland Inc.

Download a copy of the suit here.

Smurfit-Stone emerged from bankruptcy in June. It reported adjusted net income of $2 million for the second quarter, compared with a loss of $21 million a year earlier, excluding $1.4 billion in income and tax benefits from its bankruptcy exit.

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Millions of jobless Americans are getting their unemployment benefits back.

Hours after the House voted Thursday to push back the deadline to file for extended unemployment benefits until the end of November, President Obama signed the measure into law.

The approval came a day after the Senate voted 59 to 39 to restore the payments, ending a seven-week stalemate.

Some 2.9 million people were scheduled to run out of benefits by the end of the week. The jobless stopped getting their checks in early June, after Congress failed to extend the deadline to apply for unemployment insurance.

Senate Republicans, as well as Nebraska Democrat Ben Nelson, prevented the legislation’s passage, saying it should be paid for first. They suggested covering the $34 billion tab with unused stimulus money, a step the Senate Democratic leadership rejected.

Federal unemployment payments, which last up to 73 weeks, kick in after the state-funded 26 weeks of coverage expire. These federal benefits are divided into tiers, and the jobless must apply each time they move into a new tier Online payday loans.

The payments will be retroactive to the previous deadline of June 2. But it could take up to a month for states to start sending the checks again, experts said.

Lynda Kahn of Coral Springs, Fla., can’t wait to get that check. She stopped getting benefits last week and applied for Medicaid, only to be turned down because she doesn’t have dependent children. But she did get a supermarket gift card from a local charity to supplement her $200 a month food stamp allotment.

Kahn depends on her unemployment check, which was $275 a week plus a $25 stimulus-funded supplement that will be discontinued for those newly unemployed. She lost her job as a manager for a doctor’s office last August.

"It covers my mortgage payment," she said. 

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Comedian Chris Rock, hard-edge rockers Nine Inch Nails and alternative pop band Maroon Five have joined the list of artists boycotting Arizona over its new immigration law.

The three were added to the list of boycotting artists compiled by a group called the Sound Strike (www.thesoundstrike.net).

Vocalist Ben Harper and alternative band Throwing Muses also joined the Arizona boycott. Sound Strike was formed in May by Rage Against the Machine singer Zack de la Rocha in protest of Arizona’s immigration law, which gives police more authority to question detain suspected illegal immigrants empire payday loans.

Cypress Hill, Kanye West and Rise Against already previously announced boycotts. Critics of the law say it unfairly targets Hispanics. Supporters, including Gov. Jan Brewer, say it will help police combat Mexican drug cartels and smugglers.

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