content_image/268528.jpg content_image/268527.jpg
## Management’s Discussion and Analysis 

## Macroeconomic Conditions in FY2011 

## <Overseas Markets> 

Since mid-2009, the global economy had been experiencing rela- tively firm growth. However, this trend was interrupted during the July–September quarter of FY2011 when deepening concerns about government debt in Europe and the US sent financial markets into turmoil and put the brakes on economic growth in leading industrialized countries. The emerging economies that had provided much of the impetus for growth in recent years faced problems of their own. As governments tightened interest rates and export demand from industrialized countries dropped off, signs of a correc- tion began to appear. In response to signs of a slowdown in global economic growth, markets began to anticipate lower demand for raw materials, while investors fled from the commodities market in search of lower risk investments, causing prices to tumble. By the October–December quarter, increasing concerns about the debt situation in Europe had seriously unsettled the markets. This was compounded by the impact of severe flooding in Thailand in Octo- ber, which disrupted supply chains and had a major impact on global manufacturing, especially in the auto and electronics sector. Commodities markets experienced another wave of volatility as turmoil in the Middle East sent prices soaring. Conditions slowly improved in the January-March quarter as fears of a debt crisis in Europe receded and signs of an economic recovery in the US started to emerge. This eased some of the uncertainty and brought a more optimistic outlook for the global economy. 

During the first half of 2011, countries on the periphery of the eurozone slid into a debt crisis and one by one, were forced to seek help from the EU. In May, the EU and the International Mon- etary Fund (IMF) stepped in to lend financial support to Portugal, and in June a meeting of European heads of state agreed to increase the capital available in the European Financial Stability Facility from € 440 billion to € 780 billion. In July, an EC summit 

<img src='content_image/268528.jpg'>

Note: The above data comprises seasonally adjusted annual rates. Growth rates may not correspond to rates calculated based on total production. 

Source: Cabinet Office, Government of Japan 

agreed to increase support to Greece. By this time, however, con- ditions had deteriorated to the point where it looked like the author- ities were just taking stopgap measures to forestall a full-blown crisis, rather than really addressing the issues that underlie fiscal debt problems in EU countries, and which are a drain on economic growth in Europe. Credit ratings agencies lowered their ratings on government bonds in one European country after another, and markets began to question whether the Greek government could implement its reform plans. Government paralysis in countries throughout the EU lent weight to the perception that the European debt crisis had yet to be addressed seriously. 

The European Central Bank (ECB) responded to decelerating economic growth by loosening its interest rate policy in November 2011, and again in December, but the outlook remains gloomy. On the other hand, the ECB made massive amounts of liquidity avail- able to major European financial institutions in December 2011 and February 2012 in order to dispel concerns that the fiscal crisis was restricting the supply of funds to the financial sector. In March, negotiations on ways to reduce the Greek national debt progressed with no major trouble, and concerns about a possible default began to recede. 

In the United States, weak employment figures and a depressed real estate market kept the economy weak until August 2011, but strong consumer spending from September onward suggested that the US economy had hit bottom sooner than other major industrialized countries. On the other hand, concerns about the US fiscal deficit began to increase from around July. In August the Congress passed legislation that raised the federal government’s debt ceiling, which preserved the calm for the time being, but US credit agencies responded by lowering their ratings on US long- term treasury bonds, which had formerly held the highest possible rating. This revived concerns about a possible debt crisis and gen- erated turmoil in financial markets. The US Federal Reserve Board 

<img src='content_image/268527.jpg'>

Source: Tokyo Stock Exchange, Daiwa Institute of Research 

