By Takaya Yamaguchi and Tetsushi Kajimoto

TOKYO (Reuters) -Japan's government aims to reduce its budget next fiscal year for the first time in 12 years, highlighting concerns over the massive public debt of the world's third-largest economy, a draft of the 2024-25 budget reviewed by Reuters showed.

The budget is estimated to come to 112.1 trillion yen ($782 billion), compared with the initial 114.4 trillion yen set out in this fiscal year's budget, reflecting the government's will to restore the tattered public finances and revive a lacklustre economy.

Decades of stop-start fiscal spending and reform have left Japan with the industrial world's heaviest public debt burden - double the size of its economic output. It is now fighting to achieve an even tougher goal of a balanced budget, excluding new bond sales and debt-servicing costs, by the fiscal year ending in March 2026.

Tax revenue for fiscal 2024-25 is estimated to come to 69.6 trillion yen, slightly overshooting this year's estimate at 69.4 trillion yen, which would be a record amount if corporate profits recover and wage growth spreads.

Next year the government plans to forego paying into a to boost defence spending in the first of several years and reduce its 5 trillion yen emergency budget so as not to squeeze its annual spending.

The government plans to trim new bond issuance for a third straight year, counting on tax revenue growth and spending cuts. Fresh borrowing would stand at around 34.9 trillion yen, down from 35.6 trillion yen for this year's initial amount.

Finance ministry officials were not immediately available for comment.

The budget draft will be compiled on Friday before being sent to parliament for debate and approval by the start of next fiscal year starting in April.

($1 = 143.4200 yen)

By Lisa Baertlein and Arriana McLymore

LOS ANGELES/NEW YORK (Reuters) -Roxanne Ross of Florida is one of a growing number of Americans dodging higher interest rates on credit cards by instead turning to "buy now, pay later" services as they shop for holiday merchandise.

Ross has her eyes on the latest Apple (NASDAQ:AAPL) AirPods for $249. As of Monday, she was considering using Klarna, a buy now, pay later service, to spread the cost across four installments that stretch into next year.

With U.S. credit card balances at record levels and defaults rising, more shoppers than ever are tapping buy now, pay later services on key shopping days to stretch their budgets.

While they can be a tool for shoppers like Ross, who plans to continue taking out weeks-long, interest-free loans she has used for everything from plane tickets to hair extensions - consumer advocates are raising red flags about cash-strapped shoppers who are adding months-long loans with rates that can top out at 36% - the maximum lenders can charge in many states.

Demand for debt counseling services is up significantly from last year, defying the seasonal slowdown experienced during the holidays, said Bruce McClary, spokesman for the ​​​​​​​National Foundation for Credit Counseling.

The increased use of buy now, pay later loans from providers like Klarna, Affirm, PayPal (NASDAQ:PYPL) and Afterpay "signal an increase of short-term debt on top of the more than $1 trillion in outstanding credit card balances," McClary said.

Shoppers can purchase anything from a $3,253 Jil Sander leather tote bag marked 30% off from luxury retailer Farfetch (NYSE:FTCH), to groceries from Walmart (NYSE:WMT) and Burger King gift cards valued at up to $500 — getting the merchandise before it's fully paid for.

Walmart in 2021 scrapped its layaway program, which allowed people to take home merchandise after completing a series of financed payments. The world's biggest retailer, Walmart replaced that with buy now, pay later options through Affirm, setting the stage for the industry's capture of 5% of total e-commerce worldwide.

Retailers pay fees of anywhere from 2% to 8% of the purchase price to buy now, pay later firms. In comparison, credit card processing "swipe" fees run 2% to 4%.

Klarna's holiday "hot deals" include 51% off the last generation iPhone 14 Pro through Walmart, with a price tag of $699.

Consumer advocates warn that the loans could nudge some shoppers to splurge on jewelry, trendy clothing, video game consoles or appliances they otherwise could not afford. Providers told Reuters they are giving shoppers alternatives to the average credit card now charging over 20% interest, and are only extending loans to people they believe are willing and able to repay.

Credit analysts are also registering concern about the spike in shoppers turning to Affirm, Klarna and other ubiquitous payment schemes for gifts this Christmas, when higher costs for housing and food as well as borrowing on everything from credit cards to car loans squeeze budgets.

"It feels like the holiday debt hangover could be particularly nasty this year," Bankrate analyst Ted Rossman said.

CHARGING 36% INTEREST

The services do check shoppers' credit ratings to determine whether and what rate of interest to charge. Most heavily advertise 0% interest, "pay in four" biweekly installment loans. But at Affirm, for example, interest-free loans accounted for 26% of its products in its latest quarter, while interest-bearing loans stretching as long as five years accounted for 74%, according to a company presentation.

Affirm said consumers see the total cost of the loan, including interest, up front. Unlike some other providers, it said it has no hidden interest charges.

While cash-flush consumers are users, data shows that the typical BNPL borrower "already has more debt, is already more financially vulnerable and under stress," said Jennifer Chien, senior policy counsel for Financial Fairness at Consumer Reports.

Financially vulnerable households that use the loans to buy food and other essentials can see their debt snowball, which puts them in an even deeper hole. And for those shoppers, the loans may not offer a lower interest alternative to the 30% interest rates on the most expensive store credit cards.

But even users who aren't delinquent in their payments can quickly become overextended, raising the risk of spiraling costs, credit analysts warned.

Seattle-area construction foreman Robert Boyer learned the hard way. He has a balance of more than $4,000 from 18 different Affirm buy now, pay later loans on Amazon.com (NASDAQ:AMZN) merchandise, including a $700 drone, a hard hat, work boots and tools.

Boyer, 51, has a previous bankruptcy years ago, and is careful not to run up credit card debt. A recovering addict, he says he got hooked on the instant gratification of buying with small monthly payments of $18 to $40.

"I just wanted the stuff," said Boyer, who admits he didn't read the fine print. In a recent review of the debt, he found that the interest rates on his loans range from about 30% to 36%.

"It's a trap. I was absolutely caught in it," said Boyer, who shared a screenshot showing that one $572 loan at the highest interest rate will ultimately cost him $747.

He intends to repay everything in full, and doesn't plan on taking on any more debt - even though the Affirm app shows he still has $1,630 of purchasing power at Walmart and the same amount at jeweler Zales.

By Saqib Iqbal Ahmed

NEW YORK (Reuters) - The Federal Reserve's dovish December pivot has boosted the case for the weakening dollar to keep falling into 2024, though strength in the U.S. economy could limit the greenback’s decline.

After soaring to a two-decade high on the back of the Fed’s rate hikes in 2022, the U.S. currency has been largely range-bound this year on the back of resilient U.S. growth and the central bank's vow to keep borrowing costs elevated.

Last week's Fed meeting marked an unexpected shift, after Chairman Jerome Powell said the historic monetary policy tightening that brought rates to their highest level in decades was likely over, thanks to cooling inflation. Policymakers now project 75 basis points of cuts next year.

Falling rates are generally seen as a headwind for the dollar, making assets in the U.S. currency less attractive to yield-seeking investors. Though strategists had expected the dollar to weaken next year, a faster pace of rate cuts could accelerate the currency's decline.

Still, betting on a weaker dollar has been a perilous undertaking in recent years, and some investors are wary of jumping the gun. A U.S. economy that continues to outperform its peers could be one factor presenting an obstacle for bearish investors.

The Fed’s aggressive monetary policy tightening, along with post-pandemic policies to boost U.S. growth, "fueled the notion of American exceptionalism and delivered the most powerful dollar rally since the 1980s," said Kit Juckes, chief FX strategist at Societe Generale (OTC:SCGLY).

With the Fed set to ease policy, "some of those gains should be reversed," he said.

The dollar is on track for a 1% loss this year against a basket of its peers.

FADING STRENGTH?

Getting the dollar right is key for analysts and investors, given the U.S. currency's central role in global finance.

For the U.S., a weak dollar would make exports more competitive abroad and boost the profits of multinationals by making it cheaper to convert their foreign profits into dollars. About a quarter of S&P 500 companies generate more than 50% of revenues outside the U.S., according to FactSet data.

An early December Reuters poll of 71 FX strategists showed expectations for the dollar to fall against G10 currencies in 2024, with the greater part of its decline coming in the second half of the year.

Whether they're right may come down to how the U.S. economy performs compared to its global peers next year and the pace at which central banks adjust monetary policy.

So far, it's been an uneven picture. In the eurozone, a downturn in business activity deepened in December, according to closely watched surveys that show the bloc’s economy is almost certainly in recession. Still, the European Central Bank has pushed back against rate cut expectations as it remains focused on fighting inflation. The euro is up 2.4% against the dollar this year.

The "growth slowdown is more entrenched in other economies," said Thanos Bardas, senior portfolio manager at Neuberger Berman, who is bullish on the dollar over the next 12 months. "For the U.S. it will take a while for growth to slow down."

Others, however, see areas of strength, particularly in Asian economies. Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US, says he believes the market is "way too pessimistic" on the outlook for growth in China and India. Accelerating growth could boost the countries' appetite for raw materials, benefiting commodity currencies such as the Australian, New Zealand and Canadian dollars.

China will step up policy adjustments to support an economic recovery in 2024, according to state media reports.

Jack McIntyre, portfolio manager at Brandywine Global in Philadelphia, is counting on U.S. growth slowing while Chinese growth picks up. He has been selling the dollar to fund the purchase of Asian currencies.

"The dollar's bull run is very mature," he said.

The International Monetary Fund in October forecast the U.S. economy would grow by 1.5% in 2024, compared to 1.2% for the eurozone and 4.2% for China.

Of course, the dollar's trajectory could depend on how much Fed easing and falling inflation is already reflected in its price. Futures tied to the Fed's policy rate show investors factoring in more than 140 basis points in cuts next year, nearly twice as much as Fed policymakers have penciled in.

"If inflation stalls and does not continue to decline that's where the case grows for the Fed to hold off," said Matt Weller, head of market research at StoneX. "That would certainly be a bullish development for the dollar."

KARACHI, Pakistan (Reuters) - The World Bank's board of executive directors approved $350 million in financing for the Second Resilient Institutions for Sustainable Economy (RISE-II) operation in Pakistan on Tuesday.

RISE-II aims to strengthen fiscal management and promote competitiveness for sustained and inclusive economic growth in the country whose economy is struggling to grow, with persistently high inflation and foreign reserves running low.

"Based on the foundations laid through RISE II and parallel support by other IFIs, Pakistan has the opportunity to tackle long-standing structural distortions in its economy after the upcoming general elections," Derek H. C. Chen, task team leader of the operation said in a statement.

"Failing to use this opportunity would risk plunging the country back into stop-and-go economic cycles," Chen added.

The operation also aims to foster growth and competitiveness by reducing the cost of tax compliance, improving financial sector transparency, encouraging the use of digital payments and promoting exports by lowering import tariffs, the World Bank said in its statement.

By Stella Qiu

SYDNEY (Reuters) - Asian shares tracked Wall Street higher on Wednesday as U.S. rate cut fever lingered near the year's end, while oil held onto gains from the past two days after attacks by Houthi militants on ships in the Red Sea disrupted maritime trade.

Meanwhile, the yen nursed losses at a one-week trough and Japanese yields extended declines after the Bank of Japan held its policy steady and gave no sign on when it may end negative interest rates, further aiding risk appetite.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.6%, aided by a 1.2% jump in Hong Kong stocks, a 0.5% rise in Australia's resources-heavy shares and a 1% jump in South Korea.

Japan's Nikkei surged 1.6% to the highest in about one month, building on gains from Tuesday. The yen was fetching 143.82 per dollar after an overnight drop of 0.8% and benchmark ten year yields fell by another 6 basis points to 0.570%, the lowest since early August.

China's central bank left its benchmark lending rates unchanged on Wednesday, as widely expected.

Overnight on Wall Street, the Dow Jones rose 0.7%, nabbing another all-time closing high, and the Nasdaq Composite also added 0.7% to the highest level since January. The S&P 500 gained 0.6%.

The rally was fuelled by an unexpectedly dovish tone from U.S. Federal Reserve Chair Jerome Powell last Wednesday on rate cut prospects next year, with the stock market having paid little attention to the pushback since from other Fed officials.

Richmond Fed President Thomas Barkin on Tuesday welcomed the retreat in inflation but refrained from saying how that affects his outlook for policy next year. Atlanta Federal Reserve President Raphael Bostic said there was no urgency to cut rates.

Analysts at JPMorgan expect a more challenging macro backdrop for share markets next year as the recent disinflationary trend should become a major headwind for corporate margins, adding that they favour cash and bonds.

"It has become consensus that a recession will be avoided, while equity multiples appear rich, credit spreads are tight, and volatility is unusually low. Thus, even in an optimistic scenario, we believe upside is limited for risky assets," they said in a note to clients.

A BofA fund manager survey showed on Tuesday that investors turned more bullish in December, buying stocks and reducing cash holdings. They had the biggest overweight position in bonds since 2009.

Falling yields also propped up equity valuations. Benchmark 10-year yields slipped 1 basis points to 3.9163%, just above their five-month low of 3.8850%, while two-year yields were little changed at 4.4373%, nearing a seven-month trough of $4.2820.

Elsewhere, oil prices were gripped by worries about the maritime disruptions in the Red Sea after Yemen's Iran-aligned Houthi militants stepped up attacks on commercial ships in recent weeks. The U.S. announced the creation of a task force to safeguard commerce in that area.

U.S. crude futures gained for the third straight day, up 0.2% to $74.09 per barrel, after surging more than 1% on Tuesday, while Brent was steady at $79.21 per barrel.

Norway's Krone gained 1.2% overnight to 10.272 per dollar, the highest since mid August. Commodity currencies such as the Australian dollar outperformed, with the Aussie advancing 0.8% overnight to a fresh-five month high of $0.6774.

S&P Global Market Intelligence expects that it is likely all three major shipping alliances will halt services, covering up to 85% of all container fleet crossings of the Suez Canal.

"A reduction in commodity product crossings of Suez may drive a bifurcation in oil, refined oil and other commodities between Asian and Atlantic basin markets, and potentially more volatility in prices," said Chris Rogers (NYSE:ROG), head of supply chain research at S&P.

Spot gold was flat at $2,039.59 an ounce.

Investing.com-- The People’s Bank of China kept its benchmark loan prime rate unchanged at record lows on Wednesday, with monetary conditions set to remain loose for longer as China struggles with slowing economic growth. 

The PBOC left its one-year LPR at 3.45%, while the five-year LPR, which is used to determine mortgage rates, was left unchanged at 4.20% in the PBOC's final rate decision for 2023. Both rates were at historic lows, after three cuts over the past year. 

The move was largely telegraphed by the PBOC, given that it had left medium-term lending rates unchanged last week. But the central bank also injected a bumper 1.45 trillion yuan ($204 billion) worth of liquidity into the banking system last week. 

The LPR is determined by the PBOC based on considerations from 18 designated commercial banks, and is used as a benchmark for lending rates in the country.

State media reports had forecast more cuts to the LPR by end-2023. But given that the rate is already at record lows, the PBOC had little room to act.

While the PBOC has kept the lending benchmark at record lows for more than a year, calls have grown for more monetary loosening in the country, especially as a post-COVID economic recovery failed to materialize. The bank had last trimmed the one-year LPR in August, and by a smaller-than-expected margin.

A swathe of economic readings for November showed continued weakness. Chinese manufacturing activity remained in contraction, while the country slid further into disinflation as consumer spending remained weak. 

Still, recent resilience in the yuan has offered the PBOC some headroom to potentially lower rates further. But the bank has also signaled reluctance over such a move, given that it could potentially destabilize the banking sector. 

The PBOC’s liquidity measures have been aimed at shoring up capital investment and consumer spending in the country, the latter of which has dried up substantially this year.

The bank also attempted to provide more support to the beleaguered property market, which was hit with a string of high-profile defaults over the past two years. The sector accounts for a quarter of China’s economy, and has been on a sustained downturn since the COVID-19 pandemic. 

Beyond the PBOC’s liquidity injections, investors have been clamoring for more targeted, fiscal measures from Beijing to support an economic recovery. But the government has remained largely conservative in rolling out more policy support, amid concerns over high debt levels.

By Philip Blenkinsop

BRUSSELS (Reuters) -The European Union and the United States have agreed that Washington will continue to suspend tariffs on EU steel and aluminium until March 2025 and Brussels will not reimpose its retaliatory measures, the European Commission said on Tuesday.

Under the 15-month extension, the United States will refrain from its tariffs of 25% on EU steel and 10% on EU aluminium imposed in 2018 by former President Donald Trump, so parking the dispute until after U.S. and EU elections.

EU tariffs, imposed in retaliation, covered a range of U.S. goods from Harley Davidson motorcycles to bourbon whiskey and power boats.

Washington replaced its tariffs with quotas from January 2022, initially for a period of two years.

The two sides were supposed to agree on measures to tackle overcapacity before the end of 2023, but negotiations stalled ahead of a U.S-EU summit in October.

Washington has since offered to extend the tariff suspension to allow more time for talks on creating a system to counter overcapacity and promote less carbon-intensive steel-making.

European steel association Eurofer said it viewed the extension as positive and said it cleared the way for a resumption of negotiations.

The U.S. Distilled Spirits Council said it greatly appreciated the extension and that it had averted a reimposition and doubling of the EU tariff to 50% in the new year. It called for a permanent end to the dispute.

The U.S. quota system allows up to 3.3 million metric tons of EU steel and 384,000 tons of aluminium into the United States tariff-free, reflecting past trade levels, with further amounts subject to tariffs.

The European Commission has complained the system is rigid and meant EU steel was subject to some $264 million of U.S. tariffs last year, while the EU simply removed its retaliatory tariffs.

PARIS (Reuters) - French economic activity will only pick up in 2025 as lower inflation boosts consumers' purchasing power, falling short of the government's growth expectations in the meantime, the central bank forecast on Tuesday in its quarterly outlook.

After growth estimated this year at 0.8%, the euro zone's second-biggest economy is on course to expand 0.9% in 2023, according to the Bank of France, which trimmed its 2023 forecast from 0.9% following weak third quarter data.

The government is more optimistic and has based its budget planning on forecasts that pegged growth this year at 1% and next year at 1.4%.

If growth turns out closer to the central bank's forecast, the government may need to find extra savings in the budget to keep its deficit-reduction plans on track.

The Bank of France said that as inflation slows and gives households purchasing power gains, consumer spending should recover over the course of 2024, pushing overall economic growth to 1.3% in 2025 and 1.6% in 2026.

Marginally lowering its estimates, it forecast that inflation would slow from 5.7% on average this year to 2.5% next year and pass below the European Central Bank's 2% in the first quarter of 2025.

That means that wages were likely to grow faster than inflation from 2024-2025, helping support purchasing power gains and possibly tempting consumers to lower their currently high savings rates in favour of spending more.

By Marius Zaharia

HONG KONG (Reuters) - China's disappointing post-COVID recovery has raised significant doubts about the foundations of its decades of stunning growth and presented Beijing with a tough choice for 2024 and beyond: take on more debt or grow less.

The expectations were that once China ditched its draconian COVID rules, consumers would burst back into malls, foreign investment would resume, factories would rev up and land auctions and home sales stabilise.

Instead, Chinese shoppers are saving for rainy days, foreign firms pulled money out, manufacturers face waning demand from the West, local government finances wobbled, and property developers defaulted.

The dashed expectations have partly vindicated those who always doubted China's growth model, with some economists even drawing parallels with Japan's bubble before its "lost decades" of stagnation starting in the 1990s.

China sceptics argue Beijing failed to shift the economy from construction-led development to consumption-driven growth a decade ago, when it should have done so. Since then, debt has outpaced the economy, reaching levels that local governments and real estate firms now struggle to service.

Policymakers vowed this year to boost consumption, and reduce the economy's reliance on property. Beijing is guiding banks to lend more to high-end manufacturing, away from real estate.

But a concrete long-term roadmap for cleaning up debt and restructuring the economy remains elusive.

Whatever choices China makes, it will have to account for an ageing and shrinking population, and a difficult geopolitical environment as the West grows wary of doing business with the world's No.2 economy.

WHY IT MATTERS

China likely grew 5%-or-so in 2023, outrunning the global economy. However, beneath that headline is the fact China invests more than 40% of its output - twice as much as the United States - suggesting a significant portion of that is unproductive.

That means many Chinese don't feel that growth. Youth unemployment topped 21% in June, the last set of figures before China controversially stopped reporting.

University graduates who studied for advanced-economy jobs are now taking up low-skilled positions to make ends meet while others have seen their wages cut.

In an economy where 70% of household wealth is parked in property, home owners are feeling poorer. Even in one of the few bright spots of the economy, the electric vehicle sector, a price war is causing pain downstream for suppliers and workers.

The national pessimism could present President Xi Jinping with social stability risks, analysts say. If China does slip into a Japan-style decline, it would do so before ever achieving the kind of development Japan did.

That would be felt widely as most global industries depend significantly on suppliers in China. Africa and Latin America count on China buying their commodities and financing their industrialisation.

WHAT IT MEANS FOR 2024

China's problems give it little time before it has to make some tough choices.

Policymakers are keen to change the structure of the economy, but reform has always been difficult in China.

A push to boost welfare for hundreds of millions of rural migrant workers, who could - by some estimates - add 1.7% of GDP in household consumption if they had similar access to public services as urban residents, is already stalling due to worries about social stability and costs.

China's efforts to resolve its property and debt problems come up against similar concerns.

Who pays for their bad investments? Banks, state-owned firms, the central government, businesses or households?

Any of those options could mean weaker future growth, economists say.

For now, however, China appears hesitant to make choices that would sacrifice growth for reform.

Government advisers are calling for a growth target of around 5% for next year.

While that's in line with its 2023 target, it won't have the same flattering year-on-year comparison with the slump caused by the 2022 lockdowns.

Such a target might push it into more debt - the type of fiscal looseness that prompted Moody's (NYSE:MCO) to cut China's credit rating outlook to negative this month, pushing Chinese stocks to five-year lows.

Where that money gets spent will tell us if Beijing is changing its approach or doubling down a growth model many fear has run its course.

By Ira Dugal

BENGALURU (Reuters) -The International Monetary Fund has reclassified India's "de facto" exchange rate regime to "stabilized arrangement" from "floating" for December 2022 to October 2023, following an article IV review of the country's policies.

The reclassification follows the Reserve Bank of India's likely interventions in the foreign exchange market, where the rupee moved in a "very narrow range" against the U.S. dollar, "suggesting intervention likely exceeded levels necessary to address disorderly market conditions," IMF said in the report.

The IMF's Article IV consultation report reviews a country's current and medium-term economic policies and outlook.

In a press release, the IMF said its staff diverged from Indian authorities' view "that exchange rate stability reflects improvements in India’s external position and that foreign exchange interventions have been used to avoid excessive volatility not warranted by fundamentals."

Between December 2022 and October 2023, the rupee traded in a range of 80.88-83.42 against the U.S. dollar. Since October, the range has narrowed to 82.90-83.42 and volatility expectations have fallen to the lowest in over a decade.

RBI Governor Shaktikanta Das said in October that currency market interventions should not be seen as "black and white" and is needed to prevent volatility and build reserves.

India's forex reserves are assessed at just above 100% of the IMF composite reserve adequacy metric, the report said.

"Going forward, a flexible exchange rate should act as the first line of defense in absorbing external shocks," the fund said.

The IMF also projected India's economy will grow at 6.3% in both the current fiscal year and the next, below the RBI's forecast of 7% in the current year.

"India has potential for even higher growth, with greater contributions from labor and human capital, if comprehensive reforms are implemented," the IMF said.

Headline inflation is expected to gradually decline to the target although it remains volatile due to food price shocks, it added.

Volatile food prices pushed up retail inflation to 5.55% in November, above the central bank's target of 4%.

The fund called for India to pursue an “ambitious” medium-term consolidation efforts given elevated public debt levels, while welcoming the near-term approach of accelerating capital spending while tightening the fiscal stance.

The federal government's fiscal deficit is targeted at 5.9% for the current fiscal year with an aim to bring it down to 4.5% by 2025-26.