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Central banks see improvement

The central banks of Japan and Australia reported signs of improvement in their economies, but investors fretted that a global recovery was some way off after weak data from Europe and the United States.

Seeking to craft a united front on repairing the global financial system, the world's biggest emerging market powers of Brazil, Russia, India and China were holding their first formal summit in Russia.

US officials said the Obama administration would target critical weaknesses in the US financial system - the heart of the downturn - such as thin capital cushions and poor lending standards, when it proposes a regulatory overhaul this week.

In Tokyo, the Bank of Japan held its interest rate at 0.1% and upgraded its economic assessment for the second straight month, as rising output and exports raise expectations the worst is over in Japan's deepest recession since World War Two.

“Although there has been some optimism on the economy after strong industrial output data, the BOJ is still maintaining a very pessimistic view on the economy,” said Junko Niskioka, chief economist at RBS Securities in Tokyo.

“It said the economy has begun to stop worsening, but it didn't say it has stopped worsening.”

Australian central bank minutes showed that policymakers saw no “pressing need” to cut interest rates at its recent monthly policy meeting given signs of stabilization at home and abroad.

Leaders of Brazil, Russia, India and China - emerging powers that together account for 15% of the global economy - were meeting in the Urals city of Yekaterinburg as they seek more power in reshaping the global financial system.

One item under discussion may be reducing their dependence on the US dollar, with Russian President Dmitry Medvedev saying ahead of the gathering that the world needed new reserve currencies.

The recession has forced central banks to intervene in credit markets and there is now debate about when policymakers should retreat and cut stimulus spending.

A surge in long-term government bond yields over the past several weeks showed financial markets fear huge sums of money poured into economies through drastic stimulus packages will ultimately fuel inflation and cripple state finances.

Asian stock markets fell, with Japan's Nikkei down 2.9% for its worst one-day percentage loss in more than two months and a broad measure of shares elsewhere in Asia losing 1.8%, as investors worried a strong rally from March lows had run ahead of corporate prospects.

“I don't see a lot of evidence of a really solid economic recovery. All I see is a moderation in the rate of decay,” said Frank Villante, chief investment officer at Souls Funds Management in Australia.

US stocks suffered their worst slide in a month on Monday after a report on New York state's factory sector showed manufacturing slowing again in June after some improvement in recent months.

The euro hit its lowest level in almost a month against the dollar on Tuesday after the European Central Bank said euro zone lenders would probably need to write down another $283 billion.

Adding to the gloom, data showed the 16-nation bloc shed a record 1.22 million jobs in the first quarter.

Finance ministers from the Group of Eight agreed over the weekend that the global economy was showing encouraging signs of stabilization and started to consider how to unwind rescue steps.

But while International Monetary Fund Managing Director Dominique Strauss-Kahn said that he largely agreed with the G8 ministers' position, he also appealed for caution in assessing the state of the global economy.

“Their stance is that we are beginning to see some green shoots but nevertheless we have to be cautious,” Strauss-Kahn said. “The large part of the worst is not yet behind us.”

Nonetheless, minutes from the Reserve Bank of Australia's June policy meeting, showed the bank saw hopeful signs, noting in particular a strong recovery in Chinese industrial production and improvements in other east Asian economies, including Japan.

“While some uncertainty about the durability of China's economic recovery inevitably remained, there were reasonable grounds to expect that the Chinese economy would continue to record solid growth outcomes,” the RBA concluded.

The worst economic slump in six decades was triggered by bank failures and market turmoil that followed big losses on risky home loans when a US housing boom turned sour in 2007.

In the fullest summary yet of Obama's plans to overhaul financial regulation, US Treasury Secretary Timothy Geithner and White House economic adviser Lawrence Summers urged stronger consumer and investor protection, new “systemic risk” policing powers for the Federal Reserve and less reliance on credit ratings.

The plan was outlined by the officials in the Washington Post ahead of the release on Wednesday of a detailed package of proposals that has been under discussion for six months.

Geithner and Summers said a key goal will be “raising capital and liquidity requirements for all institutions,” with tighter standards for the biggest, most interconnected firms.

The officials said the plan will also propose new reporting requirements for issuers of asset-backed securities, as well as a rule saying securitizers must “retain a financial interest” in the asset-backed securities they are involved in issuing.

Securitization, or the packaging and selling of loans as securities, has been blamed by critics for eroding lending standards in the mortgage and other lending businesses. (Reuters)