Japan slipped to the brink of deflation, but tentative signs of economic improvement elsewhere and investor hopes for more steps to support a recovery helped Asian stocks rack up their biggest weekly gains in almost five months.
Policymakers gathering at next week's Group of 20 meeting in London have another chance to develop plans to tackle the turmoil and toughen regulations to ensure that mistakes that led to the banking crisis are not repeated.
President Barack Obama is set to quiz leaders of the biggest U.S. financial institutions at the White House on Friday about developments in the economy and their businesses as his administration seeks broader power to regulate the financial system.
British Prime Minister Gordon Brown, dismissing talk of a rift between him and Bank of England Governor Mervyn King over fiscal stimulus, said Britain must not rule out taking action needed to boost growth.
"Mervyn King actually said he'd be prepared to support targeted actions and I think that's a fair point," Brown said in Brazil. "We must not rule out the action that's necessary for jobs and growth."
Brown hopes to persuade other big developed and developing economies at a G20 summit in London on April 2 to agree on ambitious spending to lift the world economy out of recession.
The global recession, combined with a slide in oil prices, pushed Japanese consumer price inflation to zero in February. Retail sales also fell further than expected, more evidence that slumping global appetite for Japanese exports is hurting domestic demand in the world's second-largest economy.
"Japan is facing consumer price deflation," said Akira Maekawa, a senior economist at UBS Securities. "Japanese companies are still producing more than consumers want to buy."
Policymakers have been struggling to stimulate growth, cutting interest rates to close to zero in many big economies, increasing infrastructure spending and buying assets from troubled banks and companies to pump more money into the system.
Japanese lawmakers are likely to approve on Friday the government's 88.5 trillion yen ($896 billion) budget for the fiscal year starting April 1, the country's largest ever.
This budget and extra stimulus plans for the current fiscal year will bring Japan's government stimulus spending to 12 trillion yen since the financial crisis pushed the world's largest economies into recession.
STOCKS GAIN ON RECOVERY HOPES
The U.S. economy, the world's biggest, shrank at its fastest pace since 1982 in the fourth quarter, data on Thursday showed. But the headline figure of a 6.3 percent contraction was slightly better than the consensus forecast of a 6.5 percent decline in a Reuters survey of economists.
In spite of this, Atlanta Federal Reserve President Dennis Lockhart warned that one month of improved data does not constitute an economic recovery and the recession in the United States will last for at least a few more months.
He was referring to data on Wednesday that showed new orders for long-lasting U.S.-made goods rose in February for the first time in seven months and new home sales rebounded.
The data helped stocks recover on Wall Street, with the positive tone spilling into Asia trade as investors bet the recent rally marked a turning point.
Japan's broad TOPIX gave up early gains to end down 0.3 percent on Friday but finished the week 7.8 percent higher – its biggest weekly gain since 1997. Stocks elsewhere in Asia-Pacific added 9 percent for the week, their best performance since the start of November.
"We've hit the bottom, we're making our way up," said Bell Potter Securities private client adviser Stuart Smith in Australia.
NEW ZEALAND DILEMMA
But the increased appetite for risk was creating headaches for New Zealand's central bank, which is grappling with ways to stimulate a weak economy while still attracting enough foreign investment to finance its heavy foreign debt burden.
The economy suffered its sharpest contraction in 16 years in the fourth quarter, increasing pressure on the Reserve Bank to cut already record low interest rates.
Combined with a surge of as much as 18 percent in the New Zealand dollar this month, which is punishing exporters, much of the central bank's efforts are being undone.
Signs were somewhat brighter in South Korea, until recently a source of concern for investors worried about its hefty foreign debt burden.
Asia's fourth-largest economy shrank by a seasonally adjusted 5.1 percent in October-December 2008 from the previous three months, slower than a 5.6 percent drop first estimated in January, the Bank of Korea's revised figures showed.
Analysts said South Korea's economy would probably reach bottom by the second quarter of this year before taking off for a modest recovery thanks to a series of stimulus packages and monetary easing by authorities at home and around the world.
