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Federal Reserve chairman Ben Bernanke told Congress on Wednesday that government action has helped start an economic recovery, but that he’s worried about the state of the job market.

Bernanke also changed his stance and said he’d be willing to consider supporting some legislation that’s pending before Congress that would make the Fed more accountable.

In testimony about monetary policy before the House Financial Services Committee, Bernanke noted that the recession continues to abate, but not when it comes to the job market, which "has been hit especially hard," he said.

"The job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce," Bernanke said.

The Fed chairman said he’s particularly worried about the long-term impact on workers skills and wages and the increasing incidence of long-term unemployment.

"Indeed, more than 40 percent of the unemployed have been out of work six months or more, nearly double the share of a year ago," he said.

Bernanke also said that he expects inflation to remain in check for some time, as oil prices have flattened out and housing costs have risen very slowly, thanks to high vacancy rates.

"According to most measures, longer-term inflation expectations have remained relatively stable," he said.

Over the past year, Bernanke has faced a mixed reception whenever he’s appeared on Capitol Hill. Lawmakers credit him for pulling the economy out of the greatest recession since the Great Depression. But they also blame him for missing signals of the recession and for overlooking consumer protections.

However, the Senate voted overwhelmingly in January to confirm him for a second term.

Before Bernanke spoke, several Republican lawmakers said they particularly wanted to ask the Fed chairman about why the job market remains weak, even though Congress passed a massive $700 billion stimulus package last year quick payday loans.

House Financial Services Chairman Barney Frank, D-Mass., noted that after the stimulus package passed, fewer jobs were lost.

"It is possible to debate what is the best way to do the stimulus, but no sensible human being can deny that the stimulus had a positive effect," Frank said.

Frank asked Bernanke, specifically, whether stimulus helped stem job losses and Bernanke answered "Yes.""I think most economists would agree that the stimulus created jobs, relative to the baseline," Bernanke said.

Surprising endorsement

Bernanke also said he is prepared to support pendinglegislation authorizing Congress’ Government Accountability Office to audit "the operational integrity, collateral policies, use of third-party contractors, accounting, financial reporting, and internal controls of these special credit and liquidity facilities."

Previously, Bernanke has fought any move by Congress to audit the Fed. But his new support is for a limited audit that would not venture into monetary policy.

He also said he now supports revealing the names of firms who got emergency cheap Fed loans during the financial crisis, "after an appropriate delay." The Fed has, in the past, fought such revelations.

But he drew the line at making immediately available the names of banks coming to the discount window on a short-term basis, saying it could undermine confidence.

– CNN senior producer Scott Spoerry contributed to this report 

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New home construction rose more than expected in January, while the number of building permits issued in the month dropped, according to a government report issued Wednesday.

Construction of new homes climbed to an annual rate of 591,000 during the month, up 2.8% from December’s revised rate of 575,000, the Commerce Department said. This is an increase of 21.1% from the 488,000 rate in January 2009.

Economists surveyed by Briefing.com expected January housing starts to rise to an annual rate of 580,000.

"We’re continuing to see signs of stabilization," said real estate analyst Mike Larson of Weiss Research. "We had this Olympic ski slope-looking plunge starting in 2005 and 2006, and it looks like we’re almost getting to the bottom of that."

Larson said that housing starts picked up in January as the new home supply dwindled.

"All the excess inventory that had built up has been exhausted, and when the supply gets so lean, builders start constructing homes again," he said.

The number of building permits issued during January fell to a seasonally adjusted annual rate of 621,000. That was 4.9% below the revised December rate of 653,000, but up 16.9% from the January 2009 rate of 531,000.

Economists had expected building permits would fall to 620,000.

The decline in permits and gain in housing starts were each led by activity in the multi-family sector: Multi-family building permits plummetted 26% while starts jumped 17.6%.

Meanwhile, single-family housing starts and building permits were both up last month. Single-family starts climbed 1.5% from December and permits edged up 0.4%.

Larson said that the increase in single-family activity was an encouraging sign of stabilization, but with such a large supply of existing homes, "nothing suggests a vigorous upturn."

"I think we’re going to be treading water in this range for some time," he said. "We’re going to be making small gains or losses throughout 2010, we’re not going to be making new lows or rebounding." 

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WASHINGTON – A U.S. federal appeals court has upheld a US$290-million judgement against Microsoft Corp. in a patent case launched by Toronto-based i4i Inc.

The ruling also includes an injunction, set to go into effect Jan. 11, that would prevent the sale of at least some versions of Microsoft's popular Word word processing software.

The Tuesday decision was on an appeal Microsoft launched against a verdict returned by a Texas jury in favour of i4i . The jury found recent versions of Microsoft Word infringed on a software patent.

I4i sued Microsoft (NASDAQ:MSFT) over the way Word 2003 and Word 2007 customize XML, or extensible markup language, used in encoding and displaying information.

The injunction prevents Microsoft from selling Word products that have the capability of opening an XML file containing custom XML.

Kevin Kutz, Microsoft's director of public affairs, said the world's biggest software company is "moving quickly to comply with the injunction."

Kutz said the injunction "applies only to copies of Microsoft Word 2007 and Microsoft Office 2007 sold in the U.S. on or after the injunction date of Jan. 11, 2010."

"Copies of these products sold before this date are not affected," he added.

"With respect to Microsoft Word 2007 and Microsoft Office 2007, we have been preparing for this possibility since the District Court issued its injunction in August 2009 and have put the wheels in motion to remove this little-used feature from these products," he said.

"Therefore, we expect to have copies of Microsoft Word 2007 and Office 2007, with this feature removed, available for U.S. sale and distribution by the injunction date.

"In addition, the beta versions of Microsoft Word 2010 and Microsoft Office 2010, which are available now for downloading, do not contain the technology covered by the injunction."

Kutz also said Microsoft was considering it legal options, “which could include a request for a rehearing by the Federal Circuit Court of Appeals en banc or a request for a writ of certiorari from the U.S. Supreme Court."

– With files from The Canadian Press

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Australia’s economy probably expanded in the three months through September for a third straight quarter, boosted by government spending on roads, ports and schools.

Gross domestic product gained 0.4 percent from the second quarter, when it rose 0.6 percent, according to the median estimate in a Bloomberg News survey of 17 economists. The economy probably grew 0.7 percent from a year earlier, the survey showed. The Bureau of Statistics will release the GDP report tomorrow at 11:30 a.m. in Sydney.

Australia’s economy, one of the few to skirt the global recession, grew in the third quarter and will accelerate in 2010 as consumer confidence gains and demand rises for exports such as iron ore, the central bank said today. Faster growth adds to pressure on Governor Glenn Stevens to raise borrowing costs in February after this month becoming the only policy maker in the world to increase interest rates three times this year.

“The economy is gaining good momentum into the end of the year and we continue to expect a further Reserve Bank rate adjustment in February,” said Paul Brennan, an economist at Citigroup Inc. in Sydney.

Prime Minister Kevin Rudd’s government is spending A$22 billion ($20 billion) on ports, roads, hospitals and schools, adding 0.8 percentage point to GDP in the third quarter, Citigroup estimates.

Global Rebound

Tomorrow’s report may add to global evidence of an economic rebound. Europe’s economy emerged from its worst slump in more than six decades in the third quarter, expanding 0.4 percent from the previous three months, a report showed on Dec. 3. The U.S. economy grew at a 2.8 percent annual pace.

Australia’s economy is expanding faster and generating more jobs than the government and central bank forecast at the start of the year as China’s demand for raw materials including iron ore, coal and gas prompts mining and energy companies such as BHP Billiton Ltd., Woodside Petroleum Ltd. and Santos Ltd. to increase investment and hire workers.

Treasurer Wayne Swan last month forecast GDP will rise 1.5 percent in the 12 months through June 30, 2010, compared with a May prediction of a 0.5 percent contraction. The central bank says the economy will grow 2.25 percent this fiscal year and 3.25 percent in 2010-11.

Employers added 99,500 workers between the start of September and Nov No teletrak payday loan. 30, the biggest three-month hiring surge in three years, a report showed last week. The jobless rate fell to 5.7 percent from 5.8 percent.

Gas Deal

Chevron Corp. said this month it has signed a deal with Japan’s Tokyo Electric Power Co. to supply liquefied natural gas from its Wheatstone venture in Western Australia. The project, estimated to be worth $82 billion, is forecast to generate 6,500 jobs during construction.

It is in addition to the $39 billion Chevron-led Gorgon gas venture, also in Western Australia, which is forecast to create 10,000 jobs when construction starts early next year.

Stronger economic and jobs growth will increase Governor Stevens’s scope to increase borrowing costs next year. He raised the overnight cash rate target by a quarter percentage point on Dec. 1 to 3.75 percent, adding to similar moves in October and November.

The central bank said today its decision to raise borrowing costs two weeks ago gives it more flexibility in future.

“Members agreed that, if developments unfolded as currently expected, monetary policy would need to be adjusted further over time to lessen the degree of stimulus,” officials said in minutes released today of their Dec. 1 gathering.

‘Appropriate Stance’

“That adjustment would not be intended to slow demand compared with the current forecast path, but aimed simply at keeping the stance of policy appropriate for improving economic conditions.”

Figures available at the time of the central bank’s board meeting two weeks ago “suggested a rise in GDP for the quarter,” today’s minutes added.

Investors are betting there is a 62 percent chance of a quarter-point increase in the benchmark lending rate to 4 percent at the central bank’s next meeting on Feb. 2, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 12:02 p.m.

The statistics bureau, which normally publishes third- quarter GDP figures in the first week of December, delayed publication of the report this year by two weeks as officials adopt new accounting standards.

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U.S. shoppers may stretch tight budgets this year to reward loved ones after months of thrift, a softening of heart that store chains hope will erase the holiday season sales debacle of 2008.

Retailers from Wal-Mart Stores to Gap, RadioShack and Walgreens opened their doors on Thursday as U.S. families celebrate Thanksgiving, aiming to capture early bird shoppers a day before the official start of holiday shopping on “Black Friday.”

The unsettled state of the U.S. economy, with a 26-year high in unemployment and tighter access to credit, has industry holiday sales forecasts varying from a decline of 3 percent to an increase of 2 percent.

“The consumer is confused. They don’t know whether to spend or not,” said Marshal Cohen, senior analyst at retail consultant NPD Group.

Carlos Abril was browsing at an Old Navy in Manhattan on Thursday, but said he would not shop nearly as much this year.

“It’s tough this year, so we’re cutting back,” he said. Abril does not plan to spend on himself but would buy gifts for his nephews and other children in his family.

A weak U.S. dollar, however, has been a boon to tourists.

“Stuff is always cheaper here anyway and even more so with the dollar,” said Katy Moore, a visitor from Ireland, who was shopping at Foot Locker. She exited the store with a bag and said she would spend quite of bit of money while on vacation.

As the year-end holidays draw closer and deeper discounts beckon, consumers may splurge a bit more. Industry experts expect a strong turnout on the Black Friday weekend, but caution it will not mean a bumper holiday season as shopping trails off in the weeks before Christmas.

“The recession last year was a shock to the consumer. This year they are already tired of it,” Cohen said. “They might even reward themselves for being frugal for the whole year.”

The psyche of American shoppers is being closely watched, as a return to spending would drive overall U.S. economic growth. Early hopes for a consumer-led recovery have pushed retail shares up 47 percent this year, compared with a 23 percent rise for the Standard & Poor’s 500 Index.

Cohen, a 30-year industry veteran, travels to malls all along the U.S. East Coast over the holiday weekend. He now sets out on Thanksgiving Day as so many more stores open on the holiday itself. While traffic to stores on the Thursday is relatively light, people who do make it out are mostly hard-core shoppers and highly likely to buy.

“It’s the ultimate conversion factor,” he said.

For a graphic on U.S. holiday sales trends, click on (here)

For a Reuters Insider segment on holiday sales, click on(link.reuters.com/wuj63g) 

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Poland’s economic growth will be at least 0.7 percent this year and will sustain that rate or accelerate in 2010, Finance Minister Jacek Rostowski said.

“GDP growth won’t be less than 0.7 percent in 2009, although we hope for more,” Rostowski said today in comments confirmed by ministry spokeswoman Alina Guzinska by telephone. “In 2010, economic growth will at least match that in 2009.”

The forecast compares with a July government projection of 0 car loan.2 percent growth this year and 0.5 percent in 2010.

Poland’s economy expanded by an annual 1.1 percent in the second quarter, according to data published by the Central Statistical Office yesterday. That makes it the European Union’s only eastern member to escape a recession since the credit crisis began.

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Manufacturing in the U.S. shrank less than forecast as stimulus-induced gains in demand worldwide helped resuscitate factories from the worst slump in three decades.

The Institute for Supply Management’s factory gauge rose to an 11-month high of 48.9 in July, according to the Tempe, Arizona, group. Readings below 50 signal contraction. A report from the Commerce Department showed June building projects climbed 0.3 percent, helped by higher public spending.

Factory gauges around the world showed advances for July, indicating government programs from Washington to Beijing aimed at reviving demand are starting to take hold. Stocks climbed, while Treasury securities and the dollar sank, as investor demand for riskier assets increased.

“The recession is coming to an end,” said Conrad DeQuadros, senior economist at RDQ Economics in New York. “It does look like the second half of the year is turning out to be better than we thought.”

The Standard & Poor’s 500 Stock Index gained 1.5 percent to close at 1,002.63 today in New York, the first time the index has passed 1,000 since November. Yields on benchmark 10-year notes jumped to 3.63 percent from 3.48 percent at last week’s close, and the dollar dropped to the lowest against the currencies of six major trading partners since the weeks after Lehman Brothers Holdings Inc. went bankrupt.

Global Improvement

Another purchasing managers’ index showed manufacturing in China expanded, rising to the highest level in a year. Reports today also showed manufacturing expanded in the U.K. for the first time in more than a year, shrank less in Europe than initially estimated and declined at a slower pace in Australia.

Economists forecast the ISM gauge would rise to 46.5 from 44.8 in June, according to the median of 77 forecasts in a Bloomberg News survey. Estimates ranged from 44.1 to 49.

The readings for new orders and production jumped to the highest level in more than two years, today’s report showed. A measure of exports showed the first expansion in overseas demand since September.

“The wheels of the economic train have stopped moving in reverse and are starting to grind forward,” said Brian Bethune, chief financial economist at IHS Global Insight in Lexington, Massachusetts. “We’re starting to see a pickup in production, partly due to the turn in residential construction” and also in the automobile industry, he said.

Auto Sales

The factory slump is abating following record reductions in inventories, smaller cutbacks in business investment and an end to the slump in homebuilding. The federal “cash-for-clunkers” program is also boosting demand for cars.

Ford Motor Co. said today sales rose 2.3 percent in July, its first monthly gain since 2007 business card. Total purchases for the industry jumped to an 11.3 million annual pace last month, the highest level since September.

The government’s program, which offers as much as $4,500 for trading in older, less fuel-efficient vehicles, ran through the $1 billion available in about a week, and Congress is considering $2 billion more.

Companies such as Motorola Inc., Caterpillar Inc. and Dow Chemical Co. reported better-than-estimated earnings over the last couple of weeks.

Rockwell Collins Inc., an aircraft-parts producer based in Cedar Rapids, Iowa, last week maintained its forecast for the year and said a drop in business-jet sales appears to be nearing a bottom.

Less ‘Bad News’

“We’re starting to see some stabilization and a relative decrease in the flow of bad news,” Chief Executive Officer Clay Jones said on a conference call July 30.

Dow Chemical, the largest U.S. chemical maker, last week posted second-quarter profit that topped analysts’ estimates as demand improved from earlier in the year.

“The United States economy has found bottom, but will be slow in recovering as unemployment continues to be a drag on consumer spending,” Chief Executive Officer Andrew Liveris said in a July 30 statement.

The economy shrank at a 1 percent annual pace in the second quarter, less than forecast, figures from the Commerce Department July 31 showed, helped by a jump in government spending that masked a deeper retrenchment by consumers.

Consumer spending, which accounts for about 70 percent of the economy, fell at a 1.2 percent pace following a 0.6 percent increase in the prior quarter. Purchases slid 2 percent since the peak at their end of 2007 — the most since the 1980 recession.

Homebuilding, Stimulus

The Commerce construction report showed private residential projects rose for the second time in three months and spending by the federal government increased by the most this year.

Spending on infrastructure projects is likely to keep rising in coming months as state and local governments use funds from the $787 billion fiscal stimulus package. In addition, lower home prices and mortgage rates are beginning to boost sales, spurring residential construction and bringing an end to the worst housing slump in seven decades.

“The huge drag from residential construction will probably go away in the third quarter and that’ll provide a general lift to the economy,” said IHS Global Insight’s Bethune. “There’s no question that the fiscal stimulus is helping on the non- residential side.”

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Bank of England policy maker Andrew Sentance said the bank’s economists anticipate data today to show a “small” drop in U.K. second-quarter gross domestic product as the recession nears its end.

The contraction will be “much less than we saw in the first quarter” and will precede “evidence of positive growth in the second half of the year,” Sentance said in an interview yesterday in London.

GDP figures due at 9:30 a.m. in London will probably show a 0.3 percent decline from the first three months of 2009, the least in a year, the median forecast of 32 economists in a Bloomberg News survey shows. Former policy maker David Blanchflower told Bloomberg Television the drop may be as big as 0.4 percent and may be revised to show a bigger contraction.

The pound rose and the yield on the U.K. 10-year gilt climbed above 4 percent for the first time since June 12 after Sentance said that the bank will consider pausing bond purchases if forecasts justify it. Barclays Capital and Credit Suisse AG predict that policy makers will suspend the 125 billion-pound ($206 billion) asset-purchase program at the Aug. 6 decision.

Bank of England Deputy Governor Charles Bean said this week that the economy, which contracted 2.4 percent in the first quarter, may now have stopped shrinking.

Sentance said yesterday that policy makers may shift the bond-buying plan to a “watching” stance if new quarterly growth and inflation forecasts published next month show a recovery may be in train.

August Options

“Even if we decided not to do any more in August, there’s still the option of returning to this policy instrument in the future,” Sentance said in an interview. The question will be “whether we’re now going to move into a phase where we’re watching and observing what happens in the economy life insurance.”

Evidence is mounting that the global economy is recovering from recession. Canada’s central bank said yesterday that the nation’s slump is ending this quarter, while Federal Reserve Chairman Ben S. Bernanke said this week that the worst housing slump eight decades appears to be moderating.

Sentance said it is difficult to predict exactly when the economy will start growing again.

“There are negative drags, in particular problems in the banking sector,” he said.

Blanchflower, in an interview recorded yesterday, said any economic recovery will be “ pretty anemic, pretty slow for a year or two.” He said the bank must keep expanding its asset- purchase program, and should consider spending as much as 300 billion pounds in newly printed money. That’s twice as much as the current total authorized by the government.

‘Early Days’

“It’s very early days to say that you know the endgame is even in sight,” Blanchflower said, speaking from Dartmouth College in Hanover, New Hampshire, where he is professor of economics. “My worry is that the tightening comes too soon and people kill off any recovery that’s coming.”

Withdrawing stimulus prematurely, either by unwinding the bond-purchase program or by raising the key interest rate from the current record low of 0.5 percent, risks pushing unemployment higher, Blanchflower said. The International Labour Organization measure of joblessness may rise by a further 1 million people to reach 3.4 million, he said.

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Global investors give Federal Reserve Chairman Ben S. Bernanke top marks for combating the worst financial crisis since the Great Depression and overwhelmingly favor his reappointment amid optimism that the world economy is on the mend.

Sixty-one percent of investors surveyed in the first Quarterly Bloomberg Global Poll say the world economy is stable or improving and almost 75 percent take a favorable view of the 55-year-old chairman. By almost a three-to-one margin, they say Bernanke has earned another four-year term when his current one expires in January.

“He’s the best, maybe around the world,” said Wallace Lin, an investment manager with Euro Asset Management in Hong Kong, who participated in the poll. Investors ranked Bernanke higher than his counterparts at other major central banks, including European Central Bank President Jean-Claude Trichet.

The vote of confidence strengthens Bernanke’s hand as he faces congressional criticism that the Fed overstepped its authority by helping to rescue failing financial institutions in the midst of the crisis. It also gives his bid for another term a boost. President Barack Obama has praised Bernanke’s performance atop the central bank without saying whether he wants him to stay.

Market Repercussions

“If he weren’t renominated, it could have potentially very serious and severe repercussions on the stock market and the economy,” said Jack Liebau, a poll participant and president of Pasadena, California-based Liebau Asset Management Co.

Investors consider recession a bigger threat to the U.S. economy than rising prices over the next two years, the poll showed. Sixty-one percent cite recession as the greater risk, compared with 37 percent who name inflation.

Martin Feldstein, a professor of economics at Harvard University who was considered for the position of Fed chairman before Bernanke took over in 2006, praised the policy maker. Bernanke has “done a very good job and I think he should be reappointed,” Feldstein said in an interview yesterday on Bloomberg Television.

The first Quarterly Bloomberg Global Poll is a survey of investors and analysts on six continents. It is based on interviews from July 14 to July 17 with a random sample of 1,076 Bloomberg subscribers, who represent leading decision makers in markets, finance and economics.

Trichet, King, Zhou

The poll showed Trichet received a favorable rating of 54 percent, while Bank of England Governor Mervyn King garnered 50 percent approval and China’s central-bank governor, Zhou Xiaochuan, received 42 percent. Bernanke outpolled the other central bank chiefs even in their own regions.

Bernanke also received a higher rating than U.S. Treasury Secretary Timothy Geithner, who formerly ran the New York Federal Reserve Bank. The Treasury secretary got a 57 percent rating worldwide — even though a majority of investors in the U.S. view him unfavorably. More than 52 percent of American respondents take a negative view of Geithner, compared with about 32 percent in Europe and 24 percent in Asia.

Bernanke has countered the credit crisis with actions unprecedented in the central bank’s 95-year history. He cut the benchmark lending rate to as low as zero and expanded credit to the economy by $1.1 trillion over the past year.

U.S. Banks Recovering

More than three-quarters of investors expect U fast cash.S. financial institutions will be in better shape a year from now, though only 2 percent say they will be back to full health. Just 10 percent think they will be in worse shape.

Respondents aren’t as sanguine about European banks, with 23 percent saying their condition will deteriorate in the next year.

Investors in Asia are more optimistic than those in the U.S. and Europe about the outlook for the global economy, the poll showed. More than three-quarters of Asian investors say the world economy is stable or improving, compared with 62 percent in Europe and 50 percent in the U.S.

Regional differences in the global outlook “may be a matter of what they see around them,” said J. Ann Selzer, president of Selzer & Co. of Des Moines, Iowa, which conducted the poll for Bloomberg. Half of Asian investors “say the economy in their region is improving — more than three times as many as say that in the U.S.,” she said.

The International Monetary Fund said July 8 that emerging- market economies including China will help pull the world out of the deepest contraction in six decades.

China’s Recovery

China’s gross domestic product grew 7.9 percent in the second quarter, the government reported last week in Beijing, making the nation the first major economy to rebound from the global recession.

“Fiscal policy and monetary stimulus have been introduced around the world, and we are seeing signs, particularly in China, that they are beginning to work,” Jim Owens, chief executive officer of Caterpillar Inc., said in a statement yesterday. Peoria, Illinois-based Caterpillar, the world’s largest maker of construction equipment, reported second-quarter profit that exceeded analysts’ forecasts.

More than half the investors polled expect long-term interest rates to rise over the next six months as global growth picks up. Among equity investors, 52 percent foresee higher yields, compared with 49 percent of fixed-income investors.

Higher Long-Term Rates

“I don’t see them going anywhere but up,” said David Jaderlund, municipal bond portfolio manager with Jaderlund Investments in Albuquerque, New Mexico. Currently, he said, Treasury securities “aren’t paying anything.”

Benchmark 10-year notes yielded 3.48 percent at 5:15 p.m. yesterday in New York, compared with an average 4.56 percent over the last decade.

Investors expect short-term interest rates to be little changed over the next six months, the poll showed. Almost three quarters say central banks will hold rates near current levels to support growth.

“Monetary policy remains focused on fostering economic recovery,” Bernanke said in his semi-annual report to Congress yesterday. The Fed intends to maintain a “highly accommodative” monetary policy for “an extended period,” he said.

“The U.S. economy may be ailing,” said Selzer. “But these financial leaders agree the man at the helm of the economy is the right guy for the job, for now and for another term.”

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The Bank of Japan raised its view of the economy for the first time in almost three years on signs that a record contraction in the first quarter represented the worst of the recession.

“Economic conditions have been deteriorating, but exports and production are beginning to level out,” the bank said in a statement in Tokyo today. Previously it said the world’s second-largest economy had “deteriorated significantly.”

The central bank also decided to accept foreign currency- denominated sovereign bonds as collateral to make it easier for lenders to get cash. The first upgrade in the economic assessment since July 2006 indicates Governor Masaaki Shirakawa and his board may be reluctant to further expand a program of buying corporate and government debt, even as deflation looms.

“The upgrade of the economic assessment simply came as an endorsement to the recent set of data which had already signaled signs of a bottoming out,” said Izuru Kato, chief economist at Totan Research Institute Ltd. in Tokyo. Adding foreign currency-denominated debt as collateral should be taken as “one of many other tools for a rainy day,” Kato said.

The yen traded at 94.15 per dollar at 2:44 p.m. from 94.23 before the announcement and close to a nine-week high of 93.87 reached earlier today. The Nikkei 225 Stock Average fell 0.7 percent, heading for a weekly loss.

‘Leveling Out’

The central bank said “the pace of deterioration in economic conditions is likely to moderate gradually, leading to a leveling out of the economy.”

Industrial production and exports began to stabilize at the end of the first quarter, when gross domestic product shrank an annualized 15.2 percent, the steepest decline since records began in 1955.

The policy board unanimously voted to keep the benchmark overnight lending rate at 0.1 percent today. Since cutting the rate in December, it has begun buying commercial paper and corporate bonds from lenders, helping to ease a funding squeeze for companies.

Kintetsu Corp., an operator of rail and bus services in western Japan, will sell 10 billion yen ($106 million) of debt, the first sale of BBB-rated bonds in Japan since September, according to Bloomberg data. The difference between three-month commercial paper rated A1 against government financing bills of the same maturity was 11 basis points today from 141 on Dec. 16.

‘Easing of Tension’

“Financial conditions have remained tight, although there has been some easing of tension compared to some time ago,” the central bank said. It will accept bonds issued by the U.S., U.K., Germany and France in exchange for loans to lenders as part of a program to keep credit flowing in the economy payday advance lender.

The central bank’s assessment improved even as prospects for a global recovery darken.

The U.K. had the outlook on its AAA debt rating cut by Standard & Poor’s yesterday, and Treasury yields rose on speculation the U.S.’s rating may also be under threat. Treasury Secretary Timothy Geithner committed to cutting the budget deficit in an interview with Bloomberg Television.

The Chinese government said today that a recovery in factory output has yet to solidify as exports falter and firms struggle with “serious” overcapacity and falling profits.

Japanese Finance Minister Kaoru Yosano said this week that the GDP report signaled the “worst may be over, but efforts still need to be made to put the economy on an upward trend.” The government will also lift its economic assessment in a report on May 25, the first increase since February 2006, the Nikkei newspaper said this week, without citing sources.

Hurdles Remain

Japan still faces hurdles, including a swine flu outbreak and gains in the yen that threaten to exacerbate exporters’ losses. The currency has surged 4.7 percent against the dollar this month, and today climbed to the highest since March 19 after Yosano said the government isn’t considering intervening in the foreign-exchange market.

“Japan’s economy will probably return to a cyclical expansionary path later this year,” said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Securities Co. in Tokyo. “But it will be an L-shaped recovery rather than a full-fledged one” as spending by consumers and businesses falters, he said.

The recession, while moderating, is spreading to households as companies including Toyota Motor Corp. and Hitachi Ltd. fire workers and slash wages to minimize losses. Mid-year bonuses will plunge a record 19.4 percent this year, according to the Keidanren business lobby group.

Deflation Concern

The Bank of Japan may face pressure to step up its debt purchases should weakening domestic demand exacerbate a decline in prices, ushering in a return of the deflation that plagued the country for a decade until 2005. The central bank forecasts consumer prices will fall 1.5 percent this fiscal year and keep sliding even when the economy resumes growing next year.

“Growing slack in the economy is increasing deflationary pressure,” said Hiromichi Shirakawa, chief economist at Credit Suisse Group AG in Tokyo and a former central bank official. “If the BOJ is seriously committed to averting deflation, the bank would have no other choice but to aggressively buy risk assets.”

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