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U.S. economy slows in the fourth-quarter; consumer spending remains bright spot

WASHINGTON U.S. economic growth slowed in the fourth quarter as previously reported, with robust consumer spending offset by downward revisions to business and government investment.

Gross domestic product rose at a 1.9 percent annual rate in the final three months of 2016, the Commerce Department said on Tuesday in its second estimate for the period. That matched the estimate published last month.

Output increased at a 3.5 percent rate in the third quarter.

The economy grew 1.6 percent for all of 2016, its worst performance since 2011, after expanding 2.6 percent in 2015.

Economic data early in the first quarter has been mixed, with retail sales rising in January but homebuilding and business spending on capital goods easing.

The economy may get a boost from President Donald Trump’s proposed stimulus package of sweeping tax cuts and infrastructure spending as well as less regulations.

Trump, who pledged during last year’s election campaign to deliver 4 percent annual GDP growth, has promised a “phenomenal” tax plan that the White House said would include tax cuts for businesses and individuals.

Details on the proposal remain vague, though Treasury Secretary Steven Mnuchin said on Sunday that Trump would use a policy speech to Congress on Tuesday night to preview some aspects of his tax reform plans.

Economists polled by Reuters had expected fourth-quarter GDP would be revised up to a 2.1 percent rate.

U.S. Treasury prices rose after the data, while the dollar .DXY dipped against a basket of currencies. U.S. stock index futures were largely unchanged.


Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was revised sharply higher to a 3.0 percent rate of growth in the fourth quarter. It was previously reported to have risen at a 2.5 percent rate.

That meant private domestic demand increased at a 3.0 percent rate, faster than the 2.8 percent pace reported last month.

Some of the rise in demand was met with imports, which increased at a 8.5 percent rate rather than the 8.3 percent pace reported last month. Exports declined, leaving a trade deficit that subtracted 1.70 percentage point from GDP growth as previously reported.

There was a small downward revision to inventory investment. Businesses accumulated inventories at a rate of $46.2 billion in the last quarter, instead of the previously reported $48.7 billion. Inventory investment added 0.94 percentage points to GDP growth, down from the 1.0 percentage point estimated last month.

Business investment was revised lower to reflect a more modest pace of spending on equipment, which increased at a 1.9 percent rate instead of the previously estimated 3.1 percent pace. That was still the first increase in over a year and reflected a surge in gas and oil well drilling in line with rising crude oil prices.

Spending on mining exploration, wells and shafts increased at a 23.6 percent rate instead of the previously reported 24.3 percent pace. It declined at a 30.0 percent pace in the third quarter.

Investment in nonresidential structures was revised to show it falling at a less steep 4.5 percent pace in the fourth quarter. It was previously reported to have declined at a 5.0 percent rate. Overall, business investment contributed 0.17 percentage point to GDP growth, less than the 0.30 percentage reported last month.

Spending on residential construction increased at a 9.6 percent rate, which was downwardly revised from the 10.2 percent pace reported last month. The rebound followed two straight quarterly declines.

Government spending increased at a 0.4 percent rate in the fourth quarter, rather than the previously reported 1.2 percent pace of growth. As a result, government investment made no contribution to growth. It was previously reported to have contributed 0.21 percentage point.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

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With businesses split on U.S. border tax, wider reform looks shaky

WASHINGTON Major U.S. corporations are going to war in Washington over a Republican ‘border adjustment’ tax proposal meant to boost exports over imports, with lawmakers in Congress coming under pressure from some of the nation’s biggest employers.

The political split that is opening, most pronounced in the narrowly divided Senate, could doom the proposal. If it dies, prospects for a thorough tax code reform, a top 2017 goal for President Donald Trump’s Republicans, would be diminished.

Trump, who has vowed to produce a “phenomenal” tax reform package, without recently offering many specifics, has not taken a clear stand on border adjustment. He spoke favorably about it in a Reuters interview on Thursday.

The main thrust of border adjustment is to exempt companies from having to pay federal income tax on export revenues, while ending the deductibility of import costs from taxable income.

Border adjustment is a core part of a broad tax reform “blueprint” being pushed by House of Representatives Republicans, including House Speaker Paul Ryan and tax panel chairman Kevin Brady. The blueprint has not been put into formal legislation, but border adjustment is already a sticking point.

At least eight Republicans in the Senate have expressed concern about it. Several are from Republican-leaning states where Wal-Mart Stores Inc (WMT.N) is a major employer.

Wal-Mart is a member of Americans for Affordable Products, a business coalition working against border adjustment. Other members include Best Buy (BBY.N), Costco (COST.O), Gap Inc (GPS.N), Macy’s Inc (M.N), Nike Inc (NKE.N) and Target (TGT.N).

If the Republican-dominated House approves the blueprint and moves it to the 100-seat Senate, Republicans could lose only a handful of votes and still be able to pass the blueprint.


“If it came up today, I couldn’t support it,” Arkansas Republican Senator John Boozman told Reuters. “That’s not to say I couldn’t (support it) in the future with modifications.”

Boozman said he was concerned that border adjustment would raise prices for consumer goods such as cars and gasoline. He said he worried that Arkansas farmers could be hurt, too, if border adjustment triggered a global trade war.

Boozman’s state is home to Wal-Mart, the world’s largest retailer. Wal-Mart and its employees have been among Boozman’s biggest backers in 2011-2016, according to data compiled by the Center for Responsive Politics, a campaign finance watchdog.

Wal-Mart Chief Financial Officer Brett Biggs, on a conference call with reporters a week ago, said, “The things that are being discussed about the border adjustment tax pose a concern.”

Republican Senator Tom Cotton, Boozman’s Arkansas colleague, has also expressed concerns on border adjustment. “He supports the goals of tax reform and job growth. But he believes that a new tax on working-class Americans is not the best way to achieve those goals,” said Cotton spokeswoman Caroline Rabbitt. 

Perhaps border adjustment’s most outspoken Senate critic is Georgia Republican David Perdue. He has called the House proposal “a bad idea” and urged colleagues not to support it.

One of Perdue’s top backers in 2013-2016, according to data from the center on its website, has been the Club for Growth, a conservative group that donates large sums to like-minded politicians. Club for Growth opposes border adjustment.


Border adjustment has attracted opposition not only from retailers, but also from oil refiners and automakers.

Texas Republican John Cornyn, a senior senator whose constituents include oil and gas firms, as well as companies that do business with Mexico, told Reuters: “If you’re talking about disrupting business models that people have come to depend on, there’s a lot in play and a lot at stake.”

Border adjustment has support from U.S. multinational exporters organized in another group, the American Made Coalition. Its members include Boeing Co (BA.N), Caterpillar Inc (CAT.N), Dow Chemical Co. (DOW.N), General Electric Co (GE.N), Honeywell International Inc HON.N, Johnson Johnson (JNJ.N), Pfizer Inc (PFE.N) and United Technologies Corp (UTX.N).

Chief executives of 16 big companies sent a letter this month to lawmakers urging tax reform including border adjustment. In it, the CEOs said border adjustment would make U.S.-manufactured products more competitive abroad and at home.

Since Trump’s Reuters interview last week, the White House has sent mixed signals on border adjustment. Trump is scheduled to make a major speech to Congress on Tuesday.

“We would be surprised if Trump specifically mentions (border adjustment) on Tuesday night,” said Chris Krueger, analyst at financial firm Cowen Co. in a research report.

The proposal “is a 15-round heavyweight fight and we are only in the 3rd round … It can all end with a single uppercut from Trump in opposition, though that does not seem to be the direction the White House is headed,” Krueger said.

(Additional reporting by Nandita Bose in Chicago; Editing by Kevin Drawbaugh and James Dalgleish)

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Exclusive: China eyes 12 percent broad money supply rise in 2017

BEIJING China plans to target broad money supply growth of around 12 percent in 2017, slightly lower than last year’s goal, policy sources said, signaling a bid to contain debt risks while keeping growth on track.

Under its new “prudent and neutral” policy, the People’s Bank of China (PBOC) has adopted a modest tightening bias in a bid to cool torrid credit expansion, though it is treading cautiously to avoid hurting the economy.

The M2 growth target was endorsed by leaders at the closed-door Central Economic Work Conference in December, according to sources with knowledge of the meeting outcome.

“It’s not necessary to maintain last year’s high money supply growth,” said a source who advises the government.

“A money supply rise of 11 percent should be enough for supporting growth, but we probably need to have some extra space, considering risks in the process of deleveraging.”

China’s State Council Information Office, the government’s public relations arm, has yet to respond to a request for comment.

In 2016 the money supply target was around 13 percent, though it ultimately grew just 11.3 percent due to the effects of the central bank’s intervention to support the yuan currency CNY=CFXS, which effectively drained yuan liquidity from the economy.

Still, the PBOC injected more cash through its open market operations, medium-term lending facility (MLF) and standing lending facility (SLF), underpinning record lending of 12.65 trillion yuan ($1.84 trillion) in 2016.

Last year’s M2 target reflected Beijing’s focus on meeting its economic growth targets, but top leaders have pledged this year to shift the emphasis to addressing financial risks and asset bubbles.

Reuters has reported that China will lower its 2017 economic growth target to around 6.5 percent from last year’s 6.5-7 percent. The economy expanded 6.7 percent in 2016.

Last week, state media cited a party statement issued after a meeting of the Politburo that China must maintain stable economic development and social harmony ahead of the 19th Communist Party Congress in the autumn.

Key economic targets will be announced at the opening of the annual parliament meeting on March 5.


There have already been some substantive indicators of tighter monetary policy this year.

The central bank raised interest rates on its reverse repurchase agreements (repos) and the SLF on Feb. 3, following a rise in rates on the MLF in late January.

“The central bank could raise such policy rates further. But we cannot see any possibility of raising benchmark interest rates in the near term,” said one of the sources.

New yuan loans hit 2.03 trillion yuan in January, the second highest on record, due to a rush among lenders to maintain market share, while M2 rose an annual 11.3 percent in January.

The central bank said in a working paper published on Feb. 15 that the debt deleveraging process should be managed prudently to help avoid a liquidity crisis and asset bubbles.

China’s debt-to-GDP ratio rose to 277 percent at the end of 2016 from 254 percent the previous year, with an increasing share of new credit being used to pay debt servicing costs, UBS analysts said in a recent note.

“A decline in driving force from capital investment on economic growth is behind the rapid rise in leverage,” Ruan Jianhong, head of the Survey and Statistics Department at the central bank, said in remarks published on Friday.

In 2011, capital investment of 1 yuan could yield an increase of 0.32 yuan in GDP, but that has fallen to 0.16 yuan in 2015, Ruan told the official Financial News in an interview.

“We need to maintain appropriate economic growth. If growth slows sharply, various risks may be exposed,” said one of the sources.

For graphic on China’s economic snapshot, click:

(Reporting by Kevin Yao; Editing by Will Waterman)

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Starbucks bets on super premium ‘Roastery’ to lead Italy debut

LOS ANGELES Starbucks Corp (SBUX.O) is making a big bet on Italy, the home of espresso, with plans to debut in Milan late next year with a sprawling, super-premium Reserve Roastery in a turn-of-the-century post office building on Piazza Cordusio.

Wooing Italian coffee drinkers is a long-term goal of Chairman and Chief Executive Howard Schultz, who is handing off the top job in April to focus on building out the company’s high-end brands as executive chairman.

The world’s biggest coffee seller had initially planned to open its first cafe in Milan this year, but Schultz on Monday said Starbucks for the first time had decided to open a Roastery before a traditional shop. It is now “banking” a small number of sites for stores in Milan, whose openings will follow the Roastery debut, Schultz said.

Starbucks Roastery properties are playgrounds for coffee enthusiasts and significant investments for the company, which aims to dominate the craft coffee segment carved out by smaller, so-called “third-wave” chains such as Blue Bottle and Intelligentsia in the United States.

Starbucks debuted its first Roastery in its hometown of Seattle in December 2014, spending a reported $20 million on that 15,000-square-foot facility.

Schultz has frequently said that he was inspired to open his first coffee shop after visiting Milan and admiring the city’s thriving cafe culture.

“This store will be the culmination of a great dream of mine – 34 years in the making – to return to Milan” with an immersive retail experience, Schultz said in a statement.

Italy has the seventh highest per capita coffee consumption in Europe, according to the European Coffee Federation.

Italian artisan baker Rocco Princi will be the exclusive food provider for Starbucks’ 25,500-square-foot Milan Roastery in the Palazzo Delle Poste building and all other locations. Starbucks made a financial investment and struck a global licensing deal with Princi last year.

Starbucks previously said that Italian businessman Antonio Percassi would open the first Starbucks cafe in Milan in early 2017 under a licensing arrangement.

The Percassi group, which owns cosmetics chain Kiko and has a franchising deal in Italy with U.S. lingerie chain Victoria’s Secret, will own and operate the Milan coffee shops that will open after the Roastery, a Starbucks spokeswoman said.

Starbucks’ also has Reserve Roastery projects underway in Shanghai, Manhattan and Tokyo. The company plans to build as many as 30 such projects over time.

(Reporting by Lisa Baertlein in Los Angeles; Editing by Himani Sarkar)

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Trump seeks ‘historic’ U.S. military spending boost, domestic cuts

WASHINGTON President Donald Trump is seeking what he called a “historic” increase in defense spending, but ran into immediate opposition from Republicans in Congress who must approve his plan and said it was not enough to meet the military’s needs.

The proposed rise in the Pentagon budget to $603 billion comes as the United States has wound down major wars in Iraq and Afghanistan and remains the world’s strongest military power.

The plan came under fire from Democratic lawmakers, who said cuts being proposed to pay for the additional military spending would cripple important domestic programs such as environmental protection and education.

A White House budget official, who outlined the plan on a conference call with reporters, said the administration would propose “increasing defense by $54 billion or 10 percent.” That represents the magnitude of the increase over budget caps Congress put in place in 2011.

But Mick Mulvaney, the White House budget director, said the plan would bring the Pentagon’s budget to $603 billion in total, just 3 percent more than the $584 billion the agency spent in the most recent fiscal year, which ended on Sept. 30, 2016.

The rise would be slightly higher than the country’s current 2.5 percent rate of inflation.

“President Trump intends to submit a defense budget that is a mere 3 percent above President (Barack) Obama’s defense budget, which has left our military underfunded, undersized, and unready to confront threats to our national security,” John McCain, the Republican chairman of the Senate Armed Services Committee, said in a statement.

The defense boost would be balanced by slashing the same amount from non-defense spending, including a large reduction in foreign aid, the White House budget official said.

Trump does not have the final say on federal spending. His plan for the military is part of a budget proposal to Congress, which, although it is controlled by his fellow Republicans, will not necessarily follow his plans. Budget negotiations with lawmakers can take months.

McCain told reporters he would not vote for a budget with the slight military increase and thought it would face opposition in the Senate.

Trump told state governors at the White House his budget plan included a “historic increase in defense spending to rebuild the depleted military of the United States of America.”

He said his proposal was a “landmark event” and would send a message of “American strength, security and resolve” to other countries.


Officials familiar with Trump’s budget blueprint said the plan would call for cuts to agencies including the State Department and the Environmental Protection Agency.

One official familiar with discussions over State’s budget said the agency could see spending cut by as much as 30 percent, which would force a major department restructuring and elimination of programs.

The United States spends about $50 billion annually on the State Department and foreign assistance.

More than 120 retired U.S. generals and admirals urged Congress on Monday to fully fund U.S. diplomacy and foreign aid, saying such programs “are critical to keeping America safe.”

Trump has vowed to spare middle-class social programs such as Social Security and Medicare from any cuts.

Nancy Pelosi, the top Democrat in the House of Representatives, said Trump’s plan to slash funding for federal agencies to free up money for the Pentagon showed he was not putting American working families first.

“A $54 billion cut will do far-reaching and long-lasting damage to our ability to meet the needs of the American people and win the jobs of the future,” Pelosi said. “The president is surrendering America’s leadership in innovation, education, science and clean energy.”


An official familiar with the proposal said Trump’s request for the Pentagon included more money for shipbuilding, military aircraft and establishing “a more robust presence in key international waterways and choke points” such as the Strait of Hormuz and South China Sea.

That could put Washington at odds with Iran and China. The United States already has the world’s most powerful fighting force and it spends far more than any other country on defense.

About one-sixth of the federal budget goes to military spending.

Trump has said previously he would expand the Army to 540,000 active-duty troops from its current 480,000, increase the Marine Corps to 36 battalions from 23 – or as many as 10,000 more Marines – boost the Navy to 350 ships and submarines from 276, and raise the number of Air Force tactical aircraft to 1,200 from 1,100.

He has not said where he would place the extra hardware and forces or made clear what they would be used for. The United States has been shutting some of its military bases in recent years.

Trump has also said he would bolster the development of missile defenses and cyber capabilities. Last week, he told Reuters the United States had “fallen behind on nuclear weapon capacity.” He pledged to ensure that “we’re going to be at the top of the pack.”

(Additional reporting by Tim Ahmann, Doina Chiacu, Andy Sullivan, Idrees Ali, David Alexander, and Patricia Zengerle; Writing by Alistair Bell and Lisa Lambert; Editing by Nick Tattersall and Peter Cooney)

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Snap expects some IPO investors to make year-long commitments

Snap Inc, owner of popular messaging app Snapchat, disclosed on Monday that it expected investors buying up to a quarter of the shares in its $3.2 billion initial public offering this week to agree not to sell them for a year.

While Snap cautioned it had no binding commitments yet from investors accepting such a lock-up period, the disclosure is a sign of confidence from the company in what is expected to be the biggest U.S. IPO since Facebook Inc (FB.O).

Lock-up periods help companies moderate stock volatility by preventing company insiders from selling their shares within an allotted time. A year-long lock-up period is atypically long, potentially signifying strong demand for the IPO.

Snap is targeting a valuation of between $19.5 billion and $22.3 billion from listing on the New York Stock Exchange on Thursday. It is looking to price 200 million shares on Wednesday night at a range of $14 to $16 dollars a share.

Orders for the IPO have begun to come in at the high-end of its range, and its “book” is already oversubscribed, according to people familiar with the process who requested anonymity.

In its updated IPO registration document with the U.S. Securities and Exchange Commission on Monday, Snap said it expected approximately 50 million shares of its Class A common stock purchased by investors in the offering to be subject to a separate one-year lock-up agreement. The roughly 50 million shares are designated for new Snap IPO investors who do not currently have a stake in the company, the sources said.

Lock-up periods can buoy companies at risk of a stock selloff in the months following their IPO. This risk is particularly strong for companies in the technology sector. Eight of the 10 biggest technology IPOs fell by between 25 percent and 71 percent in their first 12 months on the public market, according to a Reuters analysis of market performance.

(Reporting by Lauren Hirsch in New York; Additional reporting by Olivia Oran in New York; Editing by Cynthia Osterman)

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Dow hits 12th record high close; Trump talks up infrastructure spending

NEW YORK U.S. stocks ended slightly higher on Monday and the Dow closed at a record high for a 12th straight session, as President Donald Trump said he would make a “big” infrastructure statement on Tuesday.

The Dow’s streak of record-high closes matches a 12-day run in 1987, with Boeing (BA.N) and UnitedHealth (UNH.N) among the biggest boosts for the Dow on Monday. The SP 500 also closed at a record high. Energy gave the biggest boost to the SP 500, with the energy index .SPNY up 0.9 percent.

Trump, who met with state governors at the White House, also said he is seeking what he called a “historic” increase in military spending of more than 9 percent, while he said his administration would be “moving quickly” on regulatory reforms.

The comments came ahead of Trump’s first address to a joint session of Congress Tuesday evening. Investors are looking for more specifics on Trump’s plans, given the hefty gains in the market since the Nov. 8 election.

“Things are moving along in terms of the Trump agenda, but we’ll get a clearer picture after tomorrow night so that might precipitate some buying or selling,” said Bucky Hellwig, senior vice president at BBT Wealth Management in Birmingham, Alabama.

Hellwig and others said there’s potentially more upside than downside from the address, given how the market has reacted in recent weeks.

Shares of U.S. defense companies – Boeing (BA.N), Raytheon (RTN.N), General Dynamics (GD.N) and Lockheed Martin (LMT.N) – rose after Trump said he would seek to boost Pentagon spending by $54 billion in his first budget proposal.

Boeing was up 1.1 percent while UnitedHealth was up 1.4 percent.

The Dow Jones Industrial Average .DJI was up 15.68 points, or 0.08 percent, to close at 20,837.44, the SP 500 .SPX gained 2.39 points, or 0.10 percent, to 2,369.73 and the Nasdaq Composite .IXIC added 16.59 points, or 0.28 percent, to 5,861.90.

In its 1987 12-day streak of record-high closes, the Dow rose 9.2 percent compared with just a 3.9 percent gain in the recent record run.

While the SP 500 is up 10.8 percent since the Nov. 8 election, the pace of the rally has slowed this year.

Trump’s promise a few weeks ago of a “phenomenal” tax announcement helped rekindle the post-election rally, driving the main U.S. markets to record highs.

Time Warner (TWX.N) ended up 0.9 percent after news that the head of the U.S. Federal Communications Commission does not expect to review ATT Inc’s (T.N) planned $85.4 billion acquisition of Time Warner.

ATT slipped 1.3 percent.

Advancing issues outnumbered declining ones on the NYSE by a 1.55-to-1 ratio; on Nasdaq, a 1.87-to-1 ratio favored advancers.

The SP 500 posted 63 new 52-week highs and one new low; the Nasdaq Composite recorded 143 new highs and 45 new lows.

(Additional reporting by Yashaswini Swamynathan in Bengaluru; Editing by Sriraj Kalluvila and James Dalgleish)

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Morgan Stanley gave some clients incorrect tax information

Morgan Stanley gave some wealth management clients incorrect information on taxes that caused some to underpay and others to overpay, according to a regulatory filing on Monday.

The bank is setting aside $70 million to cover the costs and is in discussions with the Internal Revenue Service over the errors which occurred in tax years 2011 through 2016.

“We are committed to making this right for our clients with minimal inconvenience to them,” said a Morgan Stanley spokesman.

(Reporting by Olivia Oran; Editing by Cynthia Osterman)

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Takata pleads guilty to U.S. fraud charge linked to faulty air bags

DETROIT Japan’s Takata Corp (7312.T) on Monday pleaded guilty to a felony charge as part of an expected $1 billion deal with the U.S. Justice Department that includes compensation funds for automakers and victims of its faulty airbag inflators.

After Takata’s guilty plea, a federal judge in Detroit was hearing objections on Monday to the settlement raised by lawyers for some victims of Takata inflator ruptures, who argue the settlement will be used by automakers to avoid liability, a court clerk said.

Takata hopes to wins court approval of the settlement, a key hurdle to securing the backing of an investor or acquirer that can fund a turnaround effort and help it grapple with billions of dollars in costs related to the auto industry’s biggest-ever recall.

Lawyers for U.S. vehicle owners have sued Honda Motor Co (7267.T), Nissan Motor Co (7201.T), BMW AG (BMWG.DE), Ford Motor Co (F.N), Mazda Motor Corp (7261.T),and other automakers, alleging they knew about the defective Takata air bags for years but kept using them.

At least 16 deaths have been linked to exploding Takata airbag inflators. The defects have led 10 automakers to recall more than 31 million cars worldwide since 2008. All but one of the deaths have occurred in Honda vehicles.

Kevin Dean, a South Carolina lawyer for some Takata victims suing automakers, said in a court filing on Monday that the plea agreement is “wrought with inaccurate, incomplete and misleading assertions of fact” that could help automakers avoid liability.

Takata last month had agreed to plead guilty to a single count of wire fraud related to receiving payment for the faulty deflators across state lines as part of a settlement with federal prosecutors.

U.S. prosecutors have charged three former senior Takata executives in Japan with falsifying test results to conceal the defect linked to the recall of about 100 million air bag inflators worldwide.

In January, Takata agreed to establish two independently administered restitution funds: one for $850 million to compensate automakers for recalls, and a second $125 million fund for individuals physically injured by Takata’s airbags who have not already reached a settlement with the company.

Both funds are expected to be administered by compensation expert Kenneth Feinberg, who managed a similar fund for General Motors Co (GM.N).

Automakers in the United States are set to continue recalling defective inflators through 2020. U.S. safety regulators have said automakers are responsible for replacing defective airbags no matter what happens to Takata.

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