Finance & Business World

Harry Markopolos spent nine years fruitlessly trying to convince the Securities & Exchange Commission that Bernard Madoff’s investment operation was a scam.

Markopolos, a former derivatives fund manager turned fraud investigator, became an instant star after Madoff’s fund imploded, emerging as one of the few sympathetic figures of the financial crisis. A self-described quant, Markopolos contends it took him five minutes to realize that Madoff’s vaunted returns were impossible.

These days, Markopolos hunts fraud at major corporations. He looks for whistleblowers at places like trade shows and bars near corporate offices and convinces them to file lawsuits under the False Claim Act. He gets a piece of any settlement.

Markopolos is still waiting for his big payday, but next week marks the debut of his book, "No One Would Listen: A True Financial Thriller," the story of his quest to expose Madoff and his Ponzi scheme.

James Bandler caught up with Markopolos in Boston recently to discuss the book, and how he’s doing with his life as an agent for whistleblowers. Edited excerpts are below:

Since Madoff, I would imagine every whistleblower in America would want to talk to you.

I’ve gotten a lot of interesting evidence mailed to me and some of it has been borderline lunacy, like, who killed Kennedy type of thing. Others have been grounded probably in a good set of facts, but they’re not my cases. The negatives are that my undercover days are over. I can’t be anonymous. I don’t want to be recognized with whistleblowers, because it would be harmful to their careers. I have to wear disguises more.

What do you have, wigs?

I don’t want to go into it, because that would be stupid. That’s operational security.

You were a whistleblower and you work with them now. What is the profile of the whistleblower’s personality?

If you don’t have a strong belief system, you’re not going to be a whistleblower. You have to be crazy-brave. The risks are all weighted to the downside.

Crazy-brave?

Yes. You cannot have self-doubt. You just have to go forward and say I believe in this country. I believe in these core values. I know if I get outed and get caught, I’ve committed economic suicide for myself and my family. I’m going to be on the industry blacklist easy payday loans.

You write that you were afraid that Madoff or shady gangster clients would try to kill you if they fingered you as the whistleblower. You took to checking under your car for bombs and you carried a gun everywhere with you.

I didn’t know if I was going to live through it.

You were so afraid of being identified by Madoff that you wore gloves (in 2002) when you handed a packet of information to an aide of Eliot Spitzer so that your fingerprints would not be on the documents. Were you being overly paranoid?

I had twin boys that were going to be born three months later, and I wanted to make sure that they would have a father. I knew that Spitzer came from a very wealthy family and that it was possible that he was a Madoff investor. (In fact, Spitzer’s family real estate company did lose money in the scandal.)

What would’ve you done differently?

I can think of two things that would’ve influenced the action and hopefully brought this to a successful resolution. One is approach Spitzer in the open. Take the risk. Shake his hand, look him in the eye, say, ‘I’m Harry Markopolos, I’m president of the 4,000-member Boston Security Analysts Society. I’m a derivatives expert and this is what I know about Bernie Madoff. He’s a fraud.’

I wish I had confronted Mr. Spitzer to his face. Or I should have gone to (Massachusetts Secretary of the Commonwealth) Bill Galvin. He’d taken on Wall Street titans like Spitzer had. He was a hometown boy like me.

In your book, you write that when Madoff was interviewed by the SEC inspector general and asked about you, he dismissed you as a "joke in the industry." What would you tell Madoff if you met him?

I wouldn’t want to meet him. I think he’s a pathological liar and a predator. I think he’s mentally twisted, and I know a lot more about him than he knows about me. He hunted at funerals and weddings. He’s the lowest form of scum. I don’t want to meet him or his family. I don’t want anything to do with him. I don’t want to be that close to evil.

Read more of James Bandler’s interview with Markopolos 

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The Toronto stock market fell sharply Thursday in a broad-based decline despite solid earnings reports from two of the big Canadian banks as investors opted for caution ahead of Friday's U.S. non-farm jobless report.

The S&P/TSX composite index declined 143.18 points to 11,636.55 with a report showing a surprising contraction of the U.S. service industry during November also limiting advances.

The Institute for Supply Management's non-manufacturing index fell to 48.7 from 50.6 in October. Economists had expected the index to rise to 51.5, which would show continued expansion.

Market sentiment Friday will likely be determined by the U.S. jobless report. Economists expect that employers cut 130,000 jobs last month and that the unemployment rate remained flat at 10.2 per cent.

"It's understandable that the market would tread water at this point,"" said Tim Knepp, chief investment officer of Genworth Financial Asset Management.

"Job creation is going to be the key to sustaining any kind of rally."

The Canadian dollar moved down 0.41 of a cent to 94.81 cents US.

The TSX financial sector stepped 1.3 back per cent amid reports from three major banks Thursday.

"They're bumping into resistance right now, particularly TD and CIBC are kind of at the high end of their trading ranges," said Colin Cieszynski, market analyst at CMC Markets Canada.

"We had the prices run up on anticipation of a recovery in bank earnings, and so now we're getting the recovery in bank earnings but the market had already anticipated that to a certain extent, which is why we're getting this consolidation (over the last three months)."

CIBC shares were ahead $1.52 to C$70 on the TSX after the bank reported fourth-quarter net income of $644 million or $1.56 per share, up from year-ago profit of $436 million or $1.06 per share. Revenues totalled $2.9 billion for the quarter, compared to $2.2 billion last year.

CIBC's provision for loan losses surged 91 per cent from a year ago to $424 million due to higher losses in its credit cards, unsecured personal lending and corporate lending portfolios. But provision for credit losses was down $123 million from the prior quarter, primarily due to lower losses in these same portfolios.

TD Bank Financial Group (TSX: TD) reported net income for the fourth quarter was essentially flat compared with the same period last year at just over $1 billion. TD's provision for credit losses nearly doubled to $521 million but was down from the prior quarter. Its shares fell $1.71 to $66.08 as U.S. personal and commercial banking profits tumbled 51 per cent to $122 million. And continued weakness in the U.S. real estate market brought net impaired loans higher to $879 million, a rise of 163 per cent over the same time last year payday loan.

National Bank Financial Group (TSX: NA) missed expectations reported net income of $241 million or $1.39 per share for the fourth quarter, up from year-ago profit of $70 million or 37 cents per share. Revenues came in at $1.1 billion, rising 43 per cent from $765 million last year and its shares dropped $3.78 to $60.84.

In other earnings news, shares in Bombardier Inc. (TSX: BBD.B) fell 13 cents to $4.56 after the airplane and train manufacturer said its profits fell 26 per cent to $168 million in its summer quarter amid harsh economic conditions that triggered recent layoffs. But the company said it managed to keep revenues at year-ago levels of $4.6 billion and a contract worth US$779 million with AMR Eagle Holding Corp, the parent company of American Eagle Airlines for 22 CRJ700 regional jets.

The energy sector was down 1.17 per cent as the January crude contract on the New York Mercantile Exchange slipped 14 cents to US$76.46 a barrel.

EnCana Corp. (TSX: ECA) shares were down $27.62 to $28.81 after the energy company completed its split into two companies on Monday. EnCana becomes a pure play natural gas company while Cenovus Energy Ltd. is an integrated oil company. Cenovus shares started regular trading Thursday on the TSX and were off five cents to $26.25.

The gold sector was down just over two per cent as the February bullion contract on the Nymex gained $5.30 to a record US$1,218.30 an ounce.

The base metals sector declined 1.5 per cent as March copper was down 1.35 cents at US$3.24 a pound. Sherritt International (TSX: S) lost 14 cents to C$6.48.

Market heavyweight Research In Motion Ltd. (TSX: RIM) also pressured the TSX, moving down $1.35 to $61.53.

The TSX Venture Exchange edged 0.18 of a point lower 1,461.61.

Losses also picked up in New York late in the session as the Dow Jones industrial average fell 86.53 points to 10,366.15.

The Nasdaq composite index dropped 11.89 points to 2,173.14 while the S&P 500 index ticked 9.32 points lower to 1,099.92.

In other corporate news, WestJet Airlines Ltd. (TSX: WJA) stock slipped 29 cents to $11.65 after the carrier said it expects the ongoing transition to a new reservation system will have a negative impact on its fourth-quarter passenger revenue. The Calgary-based airline said revenue is expected to be at least 11 per cent below last year.

Shares in uranium giant Cameco Corp. (TSX: CCO) gained 26 cents to $32.93 after the company approved a 17 per cent increase in the annual cash dividend to 28 cents a share from 24 cents, beginning in 2010.

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European consumer prices fell for a fourth month in September as energy prices dropped and companies cut jobs and reduced costs to weather the global economic slump.

Prices in the 16-nation euro region declined 0.3 percent from a year earlier after falling 0.2 percent in August, the European Union statistics office in Luxembourg said today. The September drop matched an initial estimate released on Sept. 30.

Lower energy costs have helped to push down consumer prices just as companies are reducing spending to survive the worst recession in at least six decades. Job cuts have pushed Europe’s unemployment rate to a 10-year high. European Central Bank President Jean-Claude Trichet said on Oct. 8 that the economy will recover “at a gradual pace” with inflation seen turning positive “in the coming months.”

“Economic activity is unlikely to be strong enough to generate significant inflationary pressures for some considerable time,” said Howard Archer, chief European economist at IHS Global Insight in London. “There is a compelling case for the ECB to retain an accommodative stance for many months to come.”

Energy prices slid 11 percent in September from a year earlier, according to today’s report, while the transport industry showed a 3.7 percent drop. Housing prices declined 1.6 percent, while food dropped 1.3 percent in the year.

Core Inflation

The core inflation rate, which excludes volatile energy and food costs, fell to 1.2 percent in September from 1.3 percent in the previous month, the report showed. That was the lowest since February 2006.

The ECB expects euro-area inflation to average about 0.4 percent this year and around 1.2 percent in 2010. The Frankfurt- based central bank aims to keep inflation just below 2 percent over the medium term.

Companies may gain more leeway to pass on costs with the economy gathering strength. European confidence in the economic outlook increased to a one-year high last month and a gauge of euro-area manufacturing and services industries showed a stronger expansion than initially estimated.

Confidence in the world economy increased for a third month in October, a Bloomberg survey of users on six continents showed yesterday. The Bloomberg Professional Global Confidence Index rose to a record 61.7. In Germany, Europe’s largest economy, business sentiment is at a 12-month high.

Consumer-Electronics Maker

Royal Philips Electronics NV, Europe’s largest consumer- electronics maker, yesterday unexpectedly reported a profit for the latest quarter after the Amsterdam-based company eliminated jobs and lowered costs. Rome-based Bulgari SpA, the world’s third-largest jeweler, said on Oct. 9 that sales improved over the past three to four months.

The ECB has purchased covered bonds, provided banks with unlimited cash over 12 months and earlier this month kept its benchmark rate at a record low of 1 percent to stimulate lending. The central bank last month raised its economic forecasts to predict a contraction of around 4.1 percent this year and an expansion of about 0.2 percent in 2010.

With some of the region’s largest companies including Royal Dutch Shell Plc and Bayerische Motoren Werke AG cutting jobs, consumers may remain reluctant to boost spending, which could curb the recovery. The jobless rate is currently at 9.6 percent, the highest in a decade.

“Companies are still cutting costs and are not yet able to push through higher prices,” said Christoph Weil, an economist at Commerzbank AG in Frankfurt. “There’s no inflation pressure anytime soon.”

ECB council member Christian Noyer said on Oct. 13 that the “moment hasn’t arrived” for the ECB to start withdrawing unconventional measures. Trichet said earlier this month that it would be “premature today to think that the crisis has been overcome and conquered in a sustainable manner.”

The statistics office will publish an estimate for October consumer prices on Oct. 30.

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The parent company of American Airlines is in talks to set up a broad venture with Japan Airlines Corp in a deal that could see the U.S. carrier investing hundreds of millions of dollars in JAL, The Wall Street Journal cited sources as saying on Saturday.

AMR Corp has been in intensive negotiations for over a month to form a “far-reaching” joint venture with the Asian carrier and is willing to invest to secure an agreement, the Journal cited people familiar with the discussions as saying.

Any investment deal would give loss-making JAL, which posted 99 billion yen ($1.1 billion) of net losses in the April-June quarter, a much-needed capital infusion.

JAL is in talks with several carriers about a cash infusion, according to separate media reports.

Sources have told Reuters that Delta Air Lines, the world’s largest carrier, is engaged in closed-door discussions to take a minority stake in the Asian carrier, to expand its global footprint.

On Saturday, Japan’s national broadcaster, NHK, reported that JAL was also seeking a capital injection of several billion yen from Air France-KLM.

The Nikkei business daily reported on Saturday that Delta had proposed in late August a capital injection of 30 billion to 50 billion yen into JAL. But it cited an unnamed senior official at JAL as saying a tie-up with Delta would be difficult because the Japanese carrier has a partnership with American through the Oneworld alliance.

Delta and Air France-KLM are in the rival SkyTeam alliance.

JAL is headed for its second-straight annual loss this business year to March, hit by a downturn in travel and as it struggles to rein in costs.

It secured a 100 billion yen government-backed loan in June and is expected to ask for more financial assistance to help it restructure.

JAL is due to submit a restructuring plan by the end of the month.

(Reporting by Edwin Chan; Editing by Peter Cooney)

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European Central Bank Governing Council member Axel Weber said he doubts whether providing liquidity to markets will solve all the problems in the world’s economy and financial markets.

“I’m not sure whether at this stage the liquidity policy that we can do as central banks has all the potential of solving all our other problems,” Weber, who is also the president of the Bundesbank, said in Jackson Hole, Wyoming, at a symposium sponsored by the Federal Reserve Bank of Kansas City free credit report instantly.

Weber noted that banks are still building up “huge amounts” of deposits at the ECB rather than lending the money.

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Bank of England Governor Mervyn King is betting that he can keep pumping money into the economy without an outbreak of inflation once growth returns.

The central bank yesterday added 50 billion pounds ($84 billion) to its asset purchase plan, taking it beyond the previous limit granted by the Treasury. Economists say King’s move risks stoking excessive inflation as the bank pumps a total of 175 billion pounds into the economy, equivalent to 12 percent of gross domestic product.

“It’s a gamble,” said Peter Dixon, a London-based economist at Commerzbank AG, Germany’s second-biggest bank. “The more we throw at this problem, the bigger the potential exit strategy risks will be.”

The Bank of England said yesterday that Britain’s recession has been deeper than officials anticipated. Deputy Governor Charles Bean warned in July that the bank risks stoking inflation if it waits too long before withdrawing stimulus and King has said that the timing of an exit strategy will still be a “tricky judgment.”

The pound has dropped 1.4 percent against the dollar since yesterday’s decision. The U.K. currency traded at $1.6743 as of 10:34 a.m. in London. The 10-year gilt yield has fallen 15 basis points to 3.678 percent. Eight of 12 primary dealers that bid at government debt auctions had predicted the central bank would announce a pause yesterday.

ECB Contrast

The scale of King’s commitment contrasts with the European Central Bank, which has so far only bought 5.1 billion euros ($7.3 billion) in covered bonds and is focusing its emergency measures on pumping money into the economy through refinancing operations.

“We are not in a situation where the instruments we have utilized are complicated and would hamper an exit,” ECB President Jean-Claude Trichet said in an interview on Bloomberg Television in Frankfurt yesterday. “We chose instruments that are easy to exit.”

Inflation in the U.K. will be the fastest in the Group of Seven nations next year, which may force the Bank of England to raise interest rates before other central banks, the Paris-based Organization for Economic Cooperation and Development predicts.

Producer prices in Britain unexpectedly rose 0.3 percent last month after manufacturing picked up the previous month, data from the Office for National Statistics showed today.

The bank said yesterday that the pound’s weakness has put “upward pressure” on consumer prices. The U.K. currency has fallen 9.6 percent from a year ago against a basket of currencies of Britain’s major trading partners.

Slowing Inflation

U credit reports free.K. central bank officials are for now emphasizing that deflation remains the economy’s bigger threat. They predicted in May that inflation may slow below 1 percent in the fourth quarter and will release new forecasts on Aug. 12. The projections may show whether the bank has become more concerned that inflation will be even slower.

The inflation rate fell to 1.8 percent in June, dropping below the bank’s 2 percent target for the first time since September 2007. The government’s former inflation measure, the retail price index excluding mortgage interest payments, has already dropped to 1 percent.

Bean told the BBC last month that “we’re not going to get inflation without having had a recovery first,” and that “we’ll get inflation if we pump too much extra money into the economy and then we don’t withdraw it fast enough.”

Outstanding Debt

The bank’s move has now left it committed to buying up as much as 22 percent of the total amount of outstanding U.K. government bonds.

“It’s an enormous amount now,” said Neville Hill, an economist at Credit Suisse Group in London and a former U.K. Treasury official. “They’re over-clubbing it. This means they think the consequences of downside risks materializing are just so severe that it’s better to play along to the upside risks.”

King’s move may nevertheless help Prime Minister Gordon Brown, who is trying to ensure the economy revives before national elections which he must call by June next year.

“If it helps support a recovery, it’s helpful for the government,” said Jeavon Lolay, an economist at Lloyds Banking Group Plc in London.

Some economists say that the U.K. recession is deep enough to curb inflation. The slump has shrunk the economy by 5.7 percent, compared with a total 6 percent drop in the contraction that ended in 1981. Royal Bank of Scotland Group Plc today reported a first-half loss as it set aside 7.52 billion pounds to cover bad loans and declining asset values.

“I don’t think it’s a gamble,” said Andrew Milligan, head of global strategy at Standard Life Investments Ltd. in Edinburgh and a former U.K. Treasury official. “I see little harm in expanding quantitative easing at this time. We’ve stopped a multi-year recession and have generated signs of a recovery. The damage is going to take time to repair, and unconventional policies are warranted.”

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A U.K. index of construction rose to the highest level in 13 months in May as the pace of declines in the housing market eased, Markit said.

The gauge, based on a survey of more than 170 construction purchasing managers, rose to 45.9 from 38.1 in April, Markit and the Chartered Institute of Purchasing and Supply said in an e- mailed statement in London today. While readings below 50 still indicate a contraction, May’s figure shows the slowest pace of declines since April 2008.

“We are starting to see the construction economy show some signs of life and steer itself back onto the road of recovery,” Roy Ayliffe, director at CIPS, said in the statement. The data show “murmurs of a possible upturn in house-building activity,” he said.

The report adds to evidence Britain’s recession is easing instant cash advance. Mortgage approvals rose to the highest level in a year in April and Hometrack Ltd. says house prices stopped falling in May. Rising unemployment may still curb Britain’s recovery, former Bank of England policy maker David Blanchflower said yesterday.

The homebuilding index rose to 48.5, from 33.7 in April, a record increase, Markit said. The gauge of commercial construction increased to 45.3 from 36.5.

Banks granted 43,201 home loans in April compared with 40,038 the previous month, the Bank of England said today in London. Average house prices in England and Wales held at 155,600 pounds ($255,000) in May, Hometrack said yesterday.

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Prices paid to U.S. producers probably rose in April as oil costs rebounded, economists said before a report today.

The projected 0.2 percent increase in wholesale prices would follow a 1.2 percent drop in March, according to the median estimate of 68 economists surveyed by Bloomberg News. Another report may show the number of people claiming jobless benefits climbed last week from a three-month low.

Signs that the worst of the recession is over may boost commodity costs further, alleviating concern over deflation, or an extended drop in prices that hurts the economy. Along with the trillions of dollars pumped into the banking system by the Federal Reserve, increases in raw materials may stoke inflation once an economic recovery takes hold.

“It’s impossible to see how deflation can persist given the amount of liquidity in the system,” said Maxwell Clarke, chief U.S. economist at 4Cast.com in New York. “With oil moving back up, the thought in people’s minds becomes that inflation could ultimately become a problem that outweighs deflation.”

The Labor Department’s producer-price report is due at 8:30 a.m. in Washington. Economists’ forecasts ranged from a decline of 0.6 percent to a 1 percent gain.

Labor may also report at the same time that initial jobless claims rose to 610,000 in the week ended May 9 from 601,000 a week earlier, according to economists surveyed. The increase in applications probably reflects the closing of all Chrysler LLC assembly plants starting May 4 for at least 30 days while the automaker reorganizes under bankruptcy.

Recession Easing

Smaller declines in manufacturing and an easing in the housing slump indicate the worst recession in at least 50 years may be starting to abate.

The economy will probably shrink at a 1.9 percent annual pace this quarter after contracting at an average 6 free car insurance quotes.2 percent rate in the prior six months, according to economists surveyed this month.

DuPont Co., the third-biggest U.S. chemical maker, and Dr Pepper Snapple Group Inc., the beverage maker spun off by Cadbury Plc last year, are among companies able to charge more. Wilmington, Delaware-based DuPont raised prices 5 percent on average in the first quarter and said demand will improve because most customers have used up inventories and are increasing purchases.

“We expect sales in the second quarter to be flat to slightly up from the first quarter,” Chief Executive Officer Ellen Kullman said on a call with investors on April 21.

Price Increases

Plano, Texas-based Dr Pepper Snapple yesterday reported first-quarter profit that beat analysts’ estimates and raised its 2009 forecast after increasing prices and cutting expenses.

“Markets and consumer sentiment appear to be on the mend,” Chief Executive Officer Larry Young said during a conference call with analysts.

Still, a report yesterday showed consumers aren’t yet totally out of the woods. Retail sales fell 0.4 percent in April after a 1.3 percent decline in March, according to data from the Commerce Department.

Producer prices are one of three monthly inflation gauges reported by Labor. Prices of goods imported into the U.S. rose 1.6 percent in April as petroleum costs surged, the government said yesterday.

Labor figures tomorrow may show consumer prices were unchanged last month after declining 0.1 percent in March, economists forecast. Excluding energy and food, prices probably rose 0.1 percent.

For their part, Fed policy makers are still more focused on the threat that prices will fall.

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The Bank of Canada, which pared its key lending rate close to zero this week, will outline new rules today for the possible use of extraordinary measures if the economy needs another boost.

The central bank will release the guidelines along with a Monetary Policy Report at 10:30 a.m. in Ottawa. Economists say Governor Mark Carney may avoid large-scale use of quantitative and credit easing policies because the country’s banks are expanding credit through the biggest global financial crisis since the 1930s.

Canada’s economy is in a deepening recession and inflation will remain below target for more than two years, policy makers said April 21. The bank said cutting its lending rate to a record low 0.25 percent and likely keeping it there for more than a year should be enough to revive the economy and eventually return inflation to its target of 2 percent.

“They have said with absolute clarity to the market that we are done” with interest rate cuts, said Derek Holt, economist at Scotia Capital in Toronto. “They have tipped their hat. They are going to take a very tepid move to quantitative easing in Canada.”

The central bank would most likely purchase assets to inject cash into the economy, according to 14 of 24 economists surveyed by Bloomberg News from April 8 to April 16. The other 10 said existing programs to purchase securities and sell them back to investors would most likely be broadened, without expanding the money supply.

‘Very Dangerous Bet’

The Bank of Canada probably won’t lay out any schedule for extraordinary monetary policy action today, Holt said. “The main idea is to signal policy intentions and to lay it out clearly that if the markets have something other than the bank’s intentions in mind, they could be placing a very dangerous bet,” Holt said.

The new policies could lead the bank to add between C$10 billion ($8.1 billion) and C$50 billion starting by July, the survey found.

“I expect them to basically put forward a ‘Canada-light’ version of quantitative easing and it won’t be as aggressive as the U.S.,” said John Clinkard, economist at Deutsche Bank in Toronto no fax payday loans. “Our economy hasn’t been as stressed.”

The U.S. Federal Reserve has more than doubled the size of its balance sheet, to $2.2 trillion last week from $884 billion a year ago. The Bank of Canada balance sheet grew 53 percent from April 2008 to the end of March this year, rising from C$53 billion to C$81 billion.

Not ‘Pre-ordained’

The central bank this month posted definitions of extraordinary policies on its Web site. It said quantitative easing involves creating new money to purchase government or private assets to encourage new bank lending. Credit easing involves purchasing assets in “credit markets which are important to the functioning of the financial system,” and may not involve creating new money, the central bank said.

Carney has said that publishing the rules doesn’t mean using the policies is “pre-ordained.”

No Canadian bank has sought a bailout since credit worldwide seized up in August 2007, and Carney said in an April 1 speech that foreign banks would need to raise $1 trillion in new capital to reduce their leverage to Canadian levels.

Those stronger balance sheets have helped keep credit flowing through Canada’s economy. Consumer and business credit has risen 11 percent since August 2007 to C$2.53 trillion.

“You can afford to do less and still have the desired impact,” said Eric Lascelles, chief economics and rates strategist at TD Securities in Toronto. “If conditions improve, it might never happen at all.”

Carney will also give more details today of the bank’s forecast for an economy that he said is slipping into a deeper recession. The Bank of Canada two days ago said the economy will shrink 3 percent this year, instead of the 1.2 percent contraction predicted in January. Next year, the central bank says the economy will grow 2.5 percent, down from an earlier growth projection of 3.8 percent, with 2011 growth forecast at 4.7 percent.

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Job prospects for Japanese workers just got worse.

The Bank of Japan’s Tankan survey yesterday showed plunging demand has saddled companies with too many employees, signaling more people may lose their jobs. Rising unemployment threatens consumer spending, the strongest part of an economy that shrank an annualized 12.1 percent in the fourth quarter.

“We’re running into a domestic crisis,” said Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo. “This started with exports but the infection has spread; we’re going to see another round of layoffs.”

The quarterly Tankan index of labor supply at Japan’s biggest companies rose to 20, the highest level since March 2003. A positive number indicates an excess of workers.

Japan’s unemployment rate climbed to a three-year high of 4.4 percent in February and economists surveyed last month said it will reach 5.5 percent in the first quarter of 2010, matching a postwar high set in April 2003.

An unprecedented collapse in sales abroad has already prompted companies from Nissan Motor Corp. to Panasonic Corp. to fire thousands of workers, cut production and restrain wages.

Confidence among large manufacturers slid to minus 58, the lowest since the quarterly Tankan survey began in 1974, the central bank said. Sentiment at the country’s biggest service companies fell to minus 31 from minus 9, a record drop.

Next Victim

“The really bad news is that domestic non-manufacturers are now expecting to get hammered by the crisis,” Schulz said. “Falling employment and decreasing household demand makes them the next victim.”

Consumer spending fell 0.4 percent in the fourth quarter from the previous three months, a fraction of the record 13.8 percent drop in exports that drove the worst quarterly contraction in gross domestic product since the 1974 oil crisis business cards.

The deteriorating job outlook has since started to take a toll. Retail sales dropped at the fastest pace in seven years in February and weakening demand prompted supermarket operators Ito-Yokado Co. and Seiyu Ltd. to cut prices of food, clothing and household products last month.

Nippon Steel Corp., the world’s second-largest mill, said yesterday it will require workers at five domestic plants to take one or two extra days off a month and cut executive pay.

Employees on temporary contracts have borne the brunt of the job cuts. The Labor Ministry estimates that 192,061 non- regular workers will have lost their jobs by June since October.

Safety Net

Some 90 percent of workers are worried about being fired or having their pay reduced, a separate central bank survey showed yesterday. Prime Minister Taro Aso this week promised new spending by mid-April to help patch a benefit system that covers less than a quarter of the country’s unemployed.

“They’ve got what looks like a safety net but in the real world it doesn’t work,” said Jesper Koll, chief executive officer at hedge fund TRJ Tantallon Research Japan in Tokyo.

Some 77 percent of jobless people aren’t getting unemployment benefits, the highest figure among Group of Seven nations except Italy, whose data weren’t available, the International Labour Organization said in a report last week.

The government will offer money to unemployed workers of Japanese descent to return to their native countries in exchange for giving up their permanent and residential visas, the Health Ministry said on March 31.

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