Japan insurers seek merger

Japan's industrial output drops

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SINGAPORE (Reuters) -- Crumbling home and auto sales pushed three Japanese insurers into merger talks and Koreans plan to cut spending on children's education, signs the global economic slump is reshaping business and lifestyles around the world.

Economic reports this week are expected to produce more bleak reading, showing global manufacturers entrenched in recession as they cut production to avoid being stuck with huge, expensive inventories in sinking economies.

Consumers, investors, central bankers and politicians are hoping to see some signs of recovery next year from the worst downturn since the 1930s as governments pump more than $1 trillion into their ailing economies.

This year will produce one of the biggest-ever stock market falls. The U.S. S&P 500 benchmark is down 41% with only three trading days left in 2008. Its biggest yearly drop was in 1931 during the Great Depression, when it fell 47.1%.

The Dow Jones Wilshire 5000 index, the broadest measure of U.S. equity performance, shows a record $7.3 trillion of stock market value has been wiped out this year as the fast-spreading global financial crisis crippled the ability of many companies to raise funds and pushed economies into recession.

The fallout has hit all sectors from banks to autos to commodities and resources. Unemployment has climbed as house prices plummet and cash-strapped consumers curtail spending, heaping more pressure on companies struggling to survive the downturn.

Three big Japanese insurance companies were the latest firms considering a merger to tackle a downturn that has hit demand for car and fire insurance in the world's second-largest economy.

Shares of Mitsui Sumitomo Insurance Group Holdings Inc., Aioi Insurance Co. and Nissay Dowa General Insurance Co. surged on Monday on hopes that a merger would increase profits and reduce competition.

The three aim to reach a basic agreement by March 2009, a company source said, which would produce the country's largest non-life insurer.

A surging yen also provided another motivation for a merger, analysts said, because it has eroded the value of the insurers' foreign-currency assets.

Yen strength has prompted official concern, underscored on Monday by Finance Minister Shoichi Nakagawa, who told the Financial Times that he was watching volatility in the foreign exchange market with alarm.

Yen strength

The yen has surged more than 18% against the U.S. dollar this year, slamming Japanese exporters like Toyota and Sony and triggering speculation the government may intervene to halt the currency's rally.

"Every day I am looking at the market developments with a sense of alarm and urgency," the paper quoted Nakagawa as saying in reference to yen volatility in an interview.

Nakagawa dismissed suggestions Japan will soon need another stimulus package, saying extra spending plans finalized this month must be implemented first, the newspaper said.

Reflecting the impact of the deepening global downturn on South Korea, central bank data showed consumer sentiment tumbled to a 10-year low in December as household incomes fell and the job market worsened.

The data indicated households had turned more pessimistic about the economic outlook and planned to reduce spending, even on children's education, an area that had been considered less vulnerable to the downturn because of a national obsession with school qualifications.

The country is among the world's top exporters of students to the United States and has the highest private-sector spending on education among the member countries of the Organization for Economic Co-operation and Development (OECD).

Private-sector education spending accounted for 2.9% of gross domestic product in 2005, 3.6 times the OECD average, the latest OECD figures show.

"Education spending has been regarded as one of the last expenses that South Koreans touch even in economic downturns. The data shows South Koreans are now taking a real hit from the economic difficulties," said Goh You-sun, an economist at Daewoo Securities.

Hopes for recovery

A global recovery in 2009 may largely hinge on how long it will take for the impact of government and central bank support measures to be fully felt - if they work as planned - and how long it will take the strained credit system to return to normal.

That would lay the foundations for a revival in battered financial markets, allow companies to expand and hire again and slowly restore shattered consumer confidence, though it may take a few years to restore company profit growth.

The new year will bring a new U.S. administration when Barack Obama is sworn in as president on Jan. 20. He is expected to unveil a massive government spending program which sources say could range from $675 billion to $775 billion over two years.

"2009, if it goes according to plan, will be a transition year from one of major disasters and financial distress to one of repair and gradual recovery," said Michael Sheldon, chief market strategist at RDM Financial in Westport, Conn.

"Looking into the new year, the economic data is likely to continue to be very weak. However, the question really is: 'How much of that bad news is already priced in (in financial markets), and how long will it last?'"