The United States launched a "stress test" programme to judge banks' resistance to a possible deeper recession, as investors await President Barack Obama's budget proposal to see what support it will give the economy.
Britain is expected later on Thursday to unveil details of its own plan to limit banks' losses on around 500 billion pounds ($853 billion) of risky assets, designed to help prevent full nationalisation of troubled lenders such as Royal Bank of Scotland, which is set to post a record UK loss.
The U.S. stress tests, mandatory for the roughly 20 institutions that each have over $100 billion in assets, will be used to determine whether they need more capital from a new U.S. Treasury programme for government preferred stock investments that can be converted into common equity.
That plan offered some hope that the ailing banking sector could be getting closer to a fix, with Citigroup saying in a research note that it initially appears positive, but it also underlined the growing cost of shoring up the battered U.S. financial sector and broader economy.
All eyes will be on Obama's first budget proposal, which he is scheduled to send to the U.S. Congress on Thursday, bracing for fights over how best to heal the economy, create a new healthcare system and still cut out-of-control deficits.
"It won't be smooth sailing," predicted Maya MacGuineas, president of the Committee for a Responsible Federal Budget, which wants tough controls to bring down deficit spending.
Obama has also pledged to cut subsidies to big farm businesses, which will reopen a long simmering fight about whether — and if so, how — the United States should reform its traditional farm supports.
JITTERS IN JAPAN
Markets will be looking for reassurances that the government has a clear idea of how to finance its plans to rebuild the U.S. economy, meaning any prolonged battle over the budget could hurt confidence.
U.S. stocks fell on Wednesday, disappointed that Obama's first major address to Congress a day earlier lacked details of his plan to kickstart growth.
Data showing U.S. sales of existing homes last month dropped to the slowest pace since July 1997 added to the gloom, helping push the Standard & Poor's 500 stock index down 1 percent.
The weak housing data fuelled a flight to what are viewed as safe assets, helping the dollar strengthen broadly.
It reached a 3-month high against the yen on Thursday, as the Japanese currency appeared to lose favour as a safe-haven bid amid concerns about deterioration in the world's second-biggest economy.
Yen weakness helped support shares of Japanese exporters such as Nissan Motor Co, but the broader Nikkei stock average edged down 0.2 percent.
The Bank of Japan has cut interest rates to near zero and started buying a range of corporate assets to combat recession, and the Yomiuri newspaper said it may be urged by the government to buy stock exchange-traded funds (ETFs).
But in a sign of the kind of resistance the central bank could meet, BOJ board member Tadao Noda said that too much intervention in terms of asset purchases could distort proper market functioning.
"I don't think the lower the interest rates and the bigger the amount of asset buying, the better," said Noda, who is seen as holding hawkish views on monetary policy.
DEARER DEPOSIT INSURANCE
One big surprise was a 6 percent jump in Australian business investment in the fourth quarter, suggesting the economy might have dodged a recession for now, and paring back expectations of an interest rate cut next week.
"We suspect it'll be the last hurrah for investment and it's downhill from here," said Su-Lin Ong, senior economist at RBC Capital Markets.
But all signs were that troubles with the banking sector worldwide will persist for some time.
The Times said on Thursday that a UK plan to limit banks' losses on toxic assets could be as high as 600 billion pounds.
Around the same time, RBS is set to post a record UK loss of up to 28 billion pounds ($40 billion) and unveil a far-reaching restructuring and plans to limit further losses from risky assets.
Australia's fourth-biggest lender, Australia and New Zealand Banking Group, forecast flat profit growth due to rising bad debt charges, and became the first of the country's top four banks to announce a dividend cut since the early 1990s.
