Japan recession deepens, China cuts rates

By Tomasz Janowski and Emily Kaiser

SINGAPORE/WASHINGTON (Reuters) - The United States sold a record-large amount of debt on Monday and China cut interest rates for the fifth time since mid-September as gloomy economic and corporate reports showed the world economy was stuck in a deep rut.

Japan reported its biggest-ever drop in exports in November while euro zone industrial new orders in October posted the deepest plunge on record, providing the latest evidence that demand was falling more quickly than governments can respond.

"This is a truly global recession," Merrill Lynch economist David Rosenberg said, pointing to Japan's weak export figures, which included a 34 percent drop in U.S. shipments.

The world's top carmaker, Toyota Motor Co forecast its first-ever group operating loss -- 150 billion yen ($1.7 billion) -- due to a collapse in global demand and a crippling rise in the yen.

U.S. heavy equipment maker Caterpillar Inc said it would cut white-collar pay by as much as half and offer buyouts to some employees as it looks to cut costs during what it characterized as "uncertain times."

The U.S. government has ramped up spending to try to cushion the economic blow, and even more stimulus is on the way when President-elect Barack Obama takes office next month. His staff is discussing how much money Congress should authorize for a package that is likely to be well over $600 billion.

That points to a massive jump in debt issuance in the coming year. So far, the United States is having no trouble attracting sufficient buyers for government debt, and a record-large $38 billion two-year note auction on Monday drew bids covering more than twice that amount.

British central bankers said interest rate cuts alone would not cure growing global economic ills that began with a crisis in the U.S. housing market and has toppled major global financial institutions.

The People's Bank of China announced another cut in lending rates, underlining the scale of problems facing the world's fourth-largest economy and the only major one that is still growing.

"The economy is slowing more sharply than expected and I think that's why the central bank rushed to cut rates again now," said Xing Ziqiang, economist at China International Capital Corp in Beijing.

The cost of one-year bank loans would fall to 5.31 percent from 5.58 percent, while the benchmark one-year deposit rate falls to 2.25 percent from 2.52 percent.

SAFE HAVEN

Interest rates were lowered almost to zero in the United States and Japan last week. But investors have flocked to the safe-haven of the U.S. Treasuries market, even if parking money there means negligible returns, or even slight losses.

The incoming administration will also have to find a way to tackle the root of the economic ailments, namely the falling housing market. A report issued on Monday showed that many borrowers whose home loans were modified to avoid default ended up seriously behind in payments just six months later.

British central bankers -- who have cut rates by three percentage points since October -- warned that interest rate cuts alone would not solve the financial crisis.