By Tetsushi Kajimoto

TOKYO (Reuters) -Japan's inflation-adjusted real wages fell the most in eight years in the fiscal year 2022, government data showed on Tuesday, highlighting the pain of inflation eroding consumers' purchasing power.

The yearly data brought home the importance of accelerating wage increases to outpace stubbornly high inflation, which is not the kind of stable and sustainable inflation that the central bank wants to see, in achieving its 2% price target.

However, analysts expect real wages to rebound this fiscal year as inflation eases, while the job market remains tight and the economy is in moderate recovery, paving the way for the Bank of Japan (BOJ) to taper its monetary easing.

Still, BOJ Governor Kazuo Ueda has repeatedly maintained that the central bank would continue monetary easing for the time being to support a fragile economy while anticipating inflation to slow to less than 2% later this year.

"Risks to inflation and wages are rather skewed to the upside," said Atsushi Takeda, chief economist at Itochu Economic Research Institute. "A combination of easing inflation, tight job market and solid company profits will lay the ground for monetary policy normalisation as early as this year."

The labour ministry data also underscored the need for Prime Minister Fumio Kishida's government to stoke a virtuous cycle of inflation and wage growth.

Nominal wages rose 1.9% in the last fiscal year ending in March, the fastest increase in 31 years, but inflation at 3.8%outpaced those pay gains, resulting in real wages falling 1.8% in fiscal 2022, the data showed.

It was the biggest yearly decline since fiscal 2014, when sales tax increases stoked broader rises in prices and pushed real wages down by 2.9%.

The data suggested that wages must rise even more to outpace inflation and help boost consumers' purchasing power and private consumption that makes up more than half the economy.

Major firms have agreed to raise wages by nearly 4% this year, the fastest in three decades, in a sign cautious Japanese firms see the need of improving pay to secure skilled workers in the face of a labour crunch in the fast-ageing population.

Wages in Japan have barely grown over the past three "lost decades" since the burst of an asset-inflated bubble economy. In comparison, some other Group of Seven (G7) economies saw wages rising at a much stronger pace of about 1.4 times during the same period.

SEOUL (Reuters) - South Korea's household credit shrank at a record pace in the first quarter as high interest rates suppressed demand, central bank data showed on Tuesday.

The country's total household credit stood at 1,853.9 trillion won ($1.40 trillion) at the end of March, down 0.7% from December and down 0.5% from a year earlier, according to the Bank of Korea.

It was the biggest quarterly drop in the data series that started in the last quarter of 2002, faster than the 0.2% loss in the previous quarter and the previous record of 0.4% in the first quarter of 2009. Its annual fall was the first ever.

South Korea's central bank was on a tightening campaign for a full year through January, raising interest rates to the highest level in 14 years. It has paused since then.

($1 = 1,320.9300 won)

By Rae Wee

SINGAPORE (Reuters) - The dollar touched a six-month high against the yen on Tuesday as expectations grew that U.S. rates will remain higher for longer and as the debt ceiling impasse kept risk sentiment fragile.

Among a slew of Federal Reserve heavyweights who spoke on Monday, some hinted that the central bank still has more to go in tightening monetary policy.

Minneapolis Fed President Neel Kashkari said that U.S. rates may have to go "north of 6%" in order for inflation to return to the Fed's 2% target, while St. Louis Fed President James Bullard said that the central bank may still need to raise another half-point this year.

Against the Japanese yen, the greenback rose to a near six-month peak of 138.80 in early Asia trade, a reflection of the stark contrast between a still-hawkish Fed and an ultra-dovish Bank of Japan.

"Markets are pricing for higher rates for longer by the Fed," said Tina Teng, market analyst at CMC Markets. "U.S. inflation is still way above the target ... and near-term, the economy is running resilient.

"I don't think the Fed will just start cutting rates anytime soon."

Money markets are pricing in a roughly 26% chance that the Fed will deliver another 25-basis-point rate hike next month, compared to a 20% chance a week ago, according to the CME FedWatch tool.

Expectations of interest rate cuts later this year have also been scaled back, with rates seen holding at around 4.7% by December.

Similarly, the greenback kept the offshore yuan pinned near its recent five-month low and it last bought 7.0547.

China on Monday kept its benchmark lending rates unchanged, as a weakening yuan and widening yield differentials with the United States limited the scope for any substantial monetary easing to shore up the country's post-COVID economic recovery.

The euro slipped 0.05% to $1.0808 and is down nearly 2% for the month thus far against a stronger dollar, reversing two straight months of gains.

Sterling edged 0.02% higher to $1.2440.

'X-DATE' LOOMS

Also on investors' minds were concerns over a looming debt ceiling deadline in the United States, which put a lid on risk sentiment and supported the safe-haven U.S. dollar.

President Joe Biden and House Speaker Kevin McCarthy ended discussions on Monday with no agreement on how to raise the U.S. government's $31.4 trillion debt ceiling and will keep talking with just 10 days before a possible default.

"The debt ceiling drama has reached a fever pitch in recent weeks," said economists at Wells Fargo (NYSE:WFC). "The policy disagreements among lawmakers appear wide as we enter crunch time."

Short-end U.S. Treasury yields have jumped, reflecting market jitters, with the yield on the one-month Treasury bill last up more than 10 bps at 5.7921%. Yields rise when bond prices fall.

The two-month Treasury bill yield last stood at 5.3246%, having touched a high of 5.4330% in the previous session. [US/]

Against a basket of currencies, the U.S. dollar steadied at 103.27, not far from a roughly two-month high hit last week.

The Aussie rose 0.05% to $0.6656, while the kiwi gained 0.07% to $0.6290.

MEXICO CITY (Reuters) - The Dominican Republic's economy is expected to grow around 4% in 2023, the IMF said on Monday, slowing from the 4.9% rise in 2022.

The economy is "one of the most dynamic and resilient in the Western Hemisphere over the last two decades," the IMF said in a statement, crediting the island nation's "sound" post-pandemic reforms.

"The strong recovery began moderating at the end of 2022 in response to tighter global financial conditions, lower global demand, and the appropriate withdrawal of policy stimulus, contributing to inflation's convergence to its target," the IMF said following a visit to the Dominican Republic.

The fund said the economic outlook for the Dominican Republic is positive, though subject to high uncertainty.

By Martin Coulter and Supantha Mukherjee

LONDON/STOCKHOLM (Reuters) - As the race to develop more powerful artificial intelligence services like ChatGPT accelerates, some regulators are relying on old laws to control a technology that could upend the way societies and businesses operate.

The European Union is at the forefront of drafting new AI rules that could set the global benchmark to address privacy and safety concerns that have arisen with the rapid advances in the generative AI technology behind OpenAI's ChatGPT.

But it will take several years for the legislation to be enforced.

"In absence of regulations, the only thing governments can do is to apply existing rules," said Massimiliano Cimnaghi, a European data governance expert at consultancy BIP.

"If it's about protecting personal data, they apply data protection laws, if it's a threat to safety of people, there are regulations that have not been specifically defined for AI, but they are still applicable."

In April, Europe's national privacy watchdogs set up a task force to address issues with ChatGPT after Italian regulator Garante had the service taken offline, accusing OpenAI of violating the EU's GDPR, a wide-ranging privacy regime enacted in 2018.

ChatGPT was reinstated after the U.S. company agreed to install age verification features and let European users block their information from being used to train the AI model.

The agency will begin examining other generative AI tools more broadly, a source close to Garante told Reuters. Data protection authorities in France and Spain also launched in April probes into OpenAI's compliance with privacy laws.

BRING IN THE EXPERTS

Generative AI models have become well known for making mistakes, or "hallucinations", spewing up misinformation with uncanny certainty.

Such errors could have serious consequences. If a bank or government department used AI to speed up decision-making, individuals could be unfairly rejected for loans or benefit payments. Big tech companies including Alphabet (NASDAQ:GOOGL)'s Google and Microsoft Corp (NASDAQ:MSFT) had stopped using AI products deemed ethically dicey, like financial products.

Regulators aim to apply existing rules covering everything from copyright and data privacy to two key issues: the data fed into models and the content they produce, according to six regulators and experts in the United States and Europe.

Agencies in the two regions are being encouraged to "interpret and reinterpret their mandates," said Suresh Venkatasubramanian, a former technology advisor to the White House. He cited the U.S. Federal Trade Commission's (FTC) investigation of algorithms for discriminatory practices under existing regulatory powers.

In the EU, proposals for the bloc's AI Act will force companies like OpenAI to disclose any copyrighted material - such as books or photographs - used to train their models, leaving them vulnerable to legal challenges.

Proving copyright infringement will not be straightforward though, according to Sergey Lagodinsky, one of several politicians involved in drafting the EU proposals.

"It's like reading hundreds of novels before you write your own," he said. "If you actually copy something and publish it, that's one thing. But if you're not directly plagiarizing someone else's material, it doesn't matter what you trained yourself on.

'THINKING CREATIVELY'

French data regulator CNIL has started "thinking creatively" about how existing laws might apply to AI, according to Bertrand Pailhes, its technology lead.

For example, in France discrimination claims are usually handled by the Defenseur des Droits (Defender of Rights). However, its lack of expertise in AI bias has prompted CNIL to take a lead on the issue, he said.

"We are looking at the full range of effects, although our focus remains on data protection and privacy," he told Reuters.

The organisation is considering using a provision of GDPR which protects individuals from automated decision-making.

"At this stage, I can't say if it's enough, legally," Pailhes said. "It will take some time to build an opinion, and there is a risk that different regulators will take different views."

In Britain, the Financial Conduct Authority is one of several state regulators that has been tasked with drawing up new guidelines covering AI. It is consulting with the Alan Turing Institute in London, alongside other legal and academic institutions, to improve its understanding of the technology, a spokesperson told Reuters.

While regulators adapt to the pace of technological advances, some industry insiders have called for greater engagement with corporate leaders.

Harry Borovick, general counsel at Luminance, a startup which uses AI to process legal documents, told Reuters that dialogue between regulators and companies had been "limited" so far.

"This doesn’t bode particularly well in terms of the future," he said. "Regulators seem either slow or unwilling to implement the approaches which would enable the right balance between consumer protection and business growth."

(This story has been refiled to fix a spelling to Massimiliano, not Massimilano, in paragraph 4)

By Byron Kaye and Renju Jose

SYDNEY (Reuters) -Australia said it would regulate buy-now-pay-later services as a consumer credit product under new laws, forcing BNPL providers to carry out background checks before lending in what would be one of the world's toughest regimes for the startup sector.

The move would put companies like Afterpay, owned by Jack Dorsey's Block Inc, and Zip Co under the watch of the Australian Securities and Investments Commission (ASIC), and Australia behind only Britain among countries that have sought to regulate BNPL as a standard credit product.

BNPL companies typically offer on-the-spot interest-free short-term loans with minimal credit checks that spread payments over weeks or months and are largely used by cash-strapped people taking debt, sometimes more than they can afford.

The absence of interest charges has so far exempted BNPL providers from consumer credit regulation and the sector has seen its business surge amid an online shopping frenzy spurred by COVID-19 stimulus payments and ultra-low interest rates.

But concerns about repayment have been rising as Australia battles high inflation, which now sits at near 30-year highs, with Australia's centre-left Labor government saying BNPL must be considered credit since it has the same impact on borrowers.

"BNPL looks like credit, it acts like credit, it carries the risks of credit," Financial Services Minister Stephen Jones said in a speech in Sydney on Monday.

"Our plan prevents lending to those who cannot afford it, without stopping safe, prudent BNPL use."

Home to about a dozen listed BNPL providers, Australia had about 7 million active BNPL accounts that resulted in A$16 billion ($11 billion) of transactions in 2021-22, up 37%, data showed.

Australians spent A$63.8 billion shopping online in 2022, with 26% of Australians saying they used BNPL to pay for purchases, retail industry figures show.

BNPL firms make most of their money charging a percentage of sales revenue to merchants, in exchange for directing shoppers to them. They charge borrowers late fees, but say they encourage on-time repayment with the promise of higher credit limits.

BNPL firms say they closely monitor borrower activity but the new Australian law would require them to follow "responsible lending" obligations that include running credit checks before lending, notifying customers when credit limits increase and following dispute resolution processes that are bound in law.

The government will unveil the draft legislation for consultation later this year and the bill will be introduced into parliament by the end of this year.

'STRONG FIRST STEP'

An Afterpay spokesperson said the change was a "strong first step in the development of a fit-for-purpose buy-now-pay-later regulatory framework".

Zip Chief Operating Officer Peter Gray said the change would mean "business as usual" since the company already complied with Australian credit law for some products.

A spokesperson for ASIC, the regulator which had advocated for the toughest possible regulation of BNPL, was not immediately available for comment.

The Australian Finance Industry Association, which had hoped its BNPL code of conduct would form the basis of self-regulation, said it would "continue to work collaboratively with the government on the details of future regulation".

Shares of Australian-listed BNPL providers were mixed by mid-session as investors digested the regulatory development that was largely expected. Local-listed shares of Afterpay owner Block were down 1.5% while shares of the biggest standalone BNPL provider, Zip, fell 5%.

"The buy now, pay later business model is still a structural growth model," said Shaun Ler, a Morningstar analyst.

"You end up in a situation where everyone is suffering but your competitors are suffering even more and the demand is still there," Ler added.

Andrew Grant, a finance lecturer at University of Sydney Business School, said the regulations "should help to create transparency for credit providers in the industry, without harming the majority of users who have a great experience with BNPL products".

($1 = 1.4743 Australian dollars)

By Lucy Craymer

WELLINGTON (Reuters) - New Zealand’s central bank is expected to deliver a 25-basis point hike on Wednesday, but the focus will be on whether the policy rate will peak at a higher level than previously thought in the wake of a more stimulatory budget last week.

After surprising financial markets with a 50-basis-point (bps) hike to 5.25% in April, the Reserve Bank of New Zealand is now under pressure to moderate its tightening pace as the economy teeters on the verge of a recession.

Yet, while back in February the RBNZ forecast the cash rate would peak at 5.5%, a growing minority of economists expect a further tightening is possible in July.

That view has gained currency after last week's government budget showed increased spending, while signs the house market is turning, surging migration and slipping mortgage rates have also raised the risk of another rate hike beyond Wednesday's policy review.

“The (relatively) happy place to sit and “watch, worry and wait” keeps inching just out of reach,” said ANZ economists in a note. ANZ now expects a 25-basis point hike this week and another increase in July.

Four economists in a Reuters poll of 21 economists now expect the cash rate to reach 5.75 or higher. Fourteen expect rates to hold at 5.50% next quarter.

A front-runner in withdrawing pandemic-era stimulus among its peers, the RBNZ has remained singularly focused on curbing inflation, lifting rates by 500 basis points since October 2021 - the most aggressive tightening streak since the cash rate was introduced in 1999.

Inflation has eased back from three-decade highs to 6.7% but remains well above the central bank’s 1% to 3% target band.

Kiwibank economists said in a note that while the data has turned in the RBNZ’s favour, a few inflationary forces are working against policymakers.

"The surge in net migration, in particular, is seen as a net-positive for demand and therefore inflation,” they added.

After the April surprise, markets remain wary of another outsized 50-basis-point rate hike this week. The money market is now pricing 39 basis points of hikes, up from 20 basis points last week.

Westpac economists said they see a strong case for an upgrade in the RBNZ’s own assessment of the OCR peak.

"The key questions are the extent of the reassessment they do now and the balance of risks they portray around that OCR (official cash rate) profile looking forward," they said

By David Morgan, Jeff Mason and Trevor Hunnicutt

WASHINGTON (Reuters) -U.S. President Joe Biden and House Republican Speaker Kevin McCarthy will meet to discuss the debt ceiling on Monday, after a "productive" phone call as the president headed back to Washington, the two sides said on Sunday.

McCarthy, speaking to reporters at the U.S. Capitol following the call, said there were positive discussions on solving the crisis and that staff-level talks were set to resume later on Sunday.

Asked if he was more hopeful after talking to the president, McCarthy said: "Our teams are talking today and we're setting (sic) to have a meeting tomorrow. That's better than it was earlier. So, yes."

A White House official confirmed Monday's meeting but offered no specific time.

Staff members from both sides reconvened at McCarthy's office in the Capitol on Sunday evening for talks that lasted about two-and-a-half hours.

Senior White House advisor Steve Ricchetti told reporters as he left the meeting, "We'll keep working tonight."

Biden, before leaving Japan following the G7 summit earlier on Sunday, said he would be willing to cut spending together with tax adjustments to reach a deal but the latest offer from Republicans ceiling was "unacceptable."

Less than two weeks remain until June 1, when the Treasury Department has warned that the federal government could be unable to pay all its debts, a deadline U.S. Treasury Secretary Janet Yellen reaffirmed on Sunday. A failure to lift the debt ceiling would trigger a default that would cause chaos in financial markets and spike interest rates.

McCarthy's comments on Sunday appeared more positive than the increasingly heated rhetoric in recent days, as both sides reverted to calling the other's position extremist and talks stalled.

"Much of what they've already proposed is simply, quite frankly, unacceptable," Biden told a news conference in Hiroshima. "It's time for Republicans to accept that there is no bipartisan deal to be made solely, solely on their partisan terms. They have to move as well."

The president later tweeted that he would not agree to a deal that protected "Big Oil" subsidies and "wealthy tax cheats" while putting healthcare and food assistance at risk for millions of Americans.

He also suggested some Republican lawmakers were willing to see the U.S. default on its debt so that the disastrous results would prevent Biden, a Democrat, from winning re-election in 2024.

After Sunday's call, McCarthy said while there was still no final deal, there was an understanding to get negotiators on both sides back together before the two leaders met: "There's no agreement. We're still apart."

"What I'm looking at are where our differences are and how could we solve those, and I felt that part was productive," he told reporters.

Meanwhile, concerns about default are weighing on markets as an increase in the government's self-imposed borrowing limit is needed regularly to cover costs of spending and tax cuts previously approved by lawmakers.

On Friday, the United States was forced to pay record-high interest rates in a recent debt offer.

SPENDING CUTS

McCarthy said Republicans backed an increase in the defense budget while cutting overall spending, and that debt ceiling talks have not included discussions about tax cuts passed under former President Donald Trump.

A source familiar with the negotiations said the Biden administration had proposed keeping non-defense discretionary spending flat for the next year.

Biden ahead of the call stressed that he was open to making spending cuts and said he was not concerned they would lead to a recession, but he could not agree to Republicans' current demands.

The Republican-led House last month passed legislation that would cut a wide swath of government spending by 8% next year. Democrats say that would force average cuts of at least 22% on programs like education and law enforcement, a figure top Republicans have not disputed.

Republicans hold a slim majority in the House and Biden's fellow Democrats have narrow control of the Senate, so no deal can pass without bipartisan support. But time is running short as Monday's meeting will take place with just 10 days left to hammer out a deal before hitting Treasury's deadline.

McCarthy has said he will give House lawmakers 72 hours to review an agreement before bringing it up for a vote.

The last time the nation has come this close to default was in 2011, also with a Democratic president and Senate with a Republican-led House.

Congress eventually averted default, but the economy endured heavy shocks, including the first-ever downgrade of the United States' top-tier credit rating and a major stock sell-off.

BEIJING (Reuters) -China's exports to North Korea soared in April from a year earlier, with wigs and fertiliser among major shipments, Chinese customs data showed on Saturday.

Chinese outbound shipments to the isolated country surged 69% year-on-year to $166 million in April, data released by China's General Administration of Customs showed.

The top export items in terms of value were processed hair and wool used in wigs, worth about $11.6 million, and diammonium hydrogen phosphate, a widely used fertiliser, worth $8.84 million.

Pyongyang purchased $5.07 million of rice from China in April.

In January-April, Chinese exports to North Korea leapt to $603 million from $270.59 million a year earlier, according to the customs data.

North Korea has long suffered from food insecurity and South Korea's DongA Ilbo newspaper reported in mid-February that Pyongyang's food crisis may have deteriorated.

The country has been under U.N. sanctions for its missile and nuclear programmes since 2006.

By James Pomfret and Engen Tham

HONG KONG/SHANGHAI (Reuters) - Some Hong Kong-based staff with U.S. consultancy Mintz Group have left the city after the firm's Beijing office was raided by Chinese police in March, according to two sources with direct knowledge of the matter.

Investigations by Chinese authorities into Mintz, as well as U.S. management consultancy Bain & Co and mainland consultancy Capvision Partners, have sent a chill through companies that deal with China, with many unclear where red lines stand as Beijing prepares to introduce stricter anti-espionage laws in July.

Moving people swiftly out of Hong Kong underscores how the crackdown in China has unnerved some companies in the global financial hub, many of which are still navigating a national security law Beijing imposed on the city in 2020.

The relocations over the last couple of months are meant to be a temporary measure to ensure staff safety, given the uncertainty of the Chinese police probe, the sources said, and involved around half a dozen employees including investigators and the head of the Hong Kong office.

One source with direct knowledge of the matter, and four other sources briefed by Mintz employees, said the firm had engaged in corporate due diligence work examining the possible use of forced labour in supply chains linked to China's Xinjiang region up until this year.

Reuters could not ascertain whether the Chinese police probe was triggered by Mintz's work on Xinjiang. But at least two other senior executives at international due diligence firms operating in China told Reuters authorities had explicitly warned them off such work in recent months.

One of the sources who has dealt with Mintz in a business capacity said several of the Hong Kong-based Mintz employees are now in Singapore, and there is no plan for them to return to Hong Kong until the probe by Chinese authorities is over.

No one was present when Reuters visited the Hong Kong office of Mintz during business hours, with the doors locked and lights off. A building management office employee said Mintz was still paying rent on its office but two employees at neighbouring offices said no one had been seen in the Mintz premises in the past few months.

Several Mintz staff profiles have been removed from Mintz's website, according to a Reuters review of archived versions of the site. It was not clear the roles of all those that had left.

Mintz declined to comment.

Confirming the raid at its Beijing office in late March, Mintz at that time said it had closed its operations there and that it was ready to work with the Chinese authorities to "resolve any misunderstanding that may have led to these events".

XINJIANG 'OFF LIMITS'

While Chinese authorities have not detailed the scope of the investigation against Mintz, the office raid and detentions of five mainland Chinese staffers, including the head of Mintz's Beijing office, have rattled the professional advisory service industry within China, with ripples now being felt in Hong Kong.

As a global financial centre, Hong Kong has a deep pool of professional services talent, including in corporate investigations, with international firms including Kroll, Control Risks, McKinsey and FTI based there.

In recent years, following the enactment of a China-imposed national security law in 2020, the United States has revised its risk assessment for U.S. citizens in Hong Kong, highlighting the heightened risks of arrest, detention, expulsion or prosecution.

Chinese and Hong Kong authorities reject Western criticism of the national security law, saying human rights are respected and all countries, including the United States, need such laws.

China's Public Security Bureau gave no response to Reuters requests for comment. The Ministry of State Security could not be reached for comment.

China's State Council Information Office, the Ministry of Foreign Affairs and the Hong Kong and Macau Affairs Office did not respond to Reuters requests for comment.

The Hong Kong government said it did not comment on individual business decisions.

A spate of laws and regulations enacted during President Xi Jinping's rule - including laws on cybersecurity, personal information protection, data security, as well as the upcoming anti-espionage law that will ban the transfer of any information related to national security - have complicated the landscape for compliance.

Two due diligence executives with international firms and extensive dealings in China said Chinese security officials periodically arranged meetings in recent years to issue explicit warnings on areas to avoid in corporate investigations.

"They would tell us exactly what areas are off-limits," said one executive. "Xinjiang was one of these."

Rights groups accuse Beijing of abuses against mainly Muslim Uyghurs in the western region of Xinjiang, including the mass use of forced labour.

The U.S. has compiled a list of companies it is sanctioning for using forced labour in Xinjiang and has passed a law that puts the onus on companies to prove that goods sourced there are free from forced labour.

China denies abuses in Xinjiang, a major cotton producer and supplier of materials for solar panels.

Mintz's Asia head, Randal Phillips, a former senior CIA official, co-authored an article carried on the firm's website last year on "sanctions due diligence" under the U.S. Uyghur Forced Labour Prevention Act, specific to Xinjiang, which has since been removed.

Phillips wrote "for some suppliers, public records and questionnaires may be sufficient; for others, independent verification, on-the-ground investigation and interviews with industry sources may be called for."

Phillips declined to comment.