(FRB) had brought an end to its quantitative easing (QE2) policy in June of 2011. However, in order to ensure that the financial turmoil did not snuff out the budding economic recovery, the Federal Open Market Committee (FOMC) announced after a meeting in August that there was a high probability that the FRB would keep interest rates at their ultra-low level, at least through the middle of 2013. This clear expression of plans to keep monetary policy loose suc- ceeded in calming the markets. In January 2012, the FRB intro- duced a long-term inflation target, in order to ease the policy stance a bit further, and confirmed its view that interest rates would remain near zero until the latter half of 2014. This extremely loose stance encouraged consumer spending, which in turn drove a gradual recovery in US economic growth. 

In the newly industrializing countries, the pace of economic growth began to slow in response to tighter monetary policy stances and the effect of slow economic growth in the leading industrialized countries. Nevertheless, economic growth remained stronger than in the industrialized regions. However, despite their tighter monetary policies, many emerging countries continued to experience high rates of inflation. This has become a serious issue for the respective governments, but with industrialized economies at a near standstill, they also need to avoid a sudden plunge in domestic economic growth. Therefore, several countries reversed course and loosened monetary policy a notch. Brazil lowered inter- est rates in August 2011, China lowered its deposit reserve ratio requirements in December and India lowered its cash reserve ratio requirement in January 2012. Although emerging economies need to keep a lid on inflation, all are moving cautiously and trying to engineer a “soft landing.” Meanwhile, severe floods in Thailand during October 2011 had a substantial short-term impact on manu- facturing and exports for many emerging Asian economies. As rebuilding activity began to kick in during the January–March 2012 quarter, this impact receded. 

## <Japan> 

The Japanese economy was hit by a severe shock on March 11, 2011, when the East Japan Earthquake shattered the northeast of the country. Manufacturing industries began to recover during the period, however, supported by rebuilding demand. Economic growth was moving onto a growth track in the early part of the year, through August, but thereafter encountered the headwinds of over- seas economic turmoil, a strong yen, and fading demand from the earthquake recovery effort. Domestic manufacturers experienced a sharp drop in exports, and this dispelled any momentum the econ- omy had experienced earlier in the year. The floods in Thailand during October were yet another blow to exports, which remained weak through the end of the year. The domestic economy con- tracted once again in the October–December quarter before moving back onto a growth trajectory in January–March 2012. Part of the fourth-quarter rebound was due to the government’s fourth 

supplementary budget of FY2011, which included a reintroduced subsidy program for eco-friendly automobiles. In addition to the pickup in auto sales and production, the yen weakened slightly from mid-February through the end of the fiscal year, and employ- ment conditions showed signs of improvement. As the period came to an end, the outlook had improved. Rebuilding demand associated with the 2011 earthquake and tsunami are likely to support a gradual recovery in the near future. 

Domestic manufacturing activity was battered in the immediate aftermath of the earthquake, due to severe damage to the supply chains and enforced inactivity during rolling electric power black- outs. This naturally made it difficult to transport products, and severely depressed exports. However, companies responded to the crisis well, considering the situation. Production lines resumed operation sooner than expected and as supply capabilities recov- ered, manufacturing activity resumed growth from April 2011 onward. Manufacturing activity faced some difficulty during the summer due to a shortage of electric power, but nationwide efforts to save energy, coupled with measures by the electric power com- panies to increase capacity, succeeded in limiting the impact on output. The government’s reintroduced subsidy program for eco- friendly automobiles contributed to a rebound in automobile pro- duction during early 2012, which drove growth in domestic industrial output as a whole. Exports rose earlier in the year as production activity recovered, but the strong yen and weak eco- nomic growth overseas caused exports to stall in September 2011. The floods in Thailand in October caused both exports and produc- tion activity in some sectors to contract temporarily, but the impact gradually faded as facilities were rebuilt. The balance of trade for the full fiscal year showed a trade deficit for the first time in three years as factors like the earthquake, flooding and a strong yen hurt exports and as high raw materials prices and the use of oil and gas to offset the suspension of nuclear power generators pushed up imports. Consumer spending improved from the start of the fiscal year through October in response to improving consumer confi- dence and a better employment market. Thereafter, consumer confidence weakened and personal consumption stalled temporar- ily, but it recovered again in early 2012 thanks to the reintroduced subsidy program for eco-friendly cars and a rise in automobile purchases. By the end of FY2011, consumer spending showed signs of recovery. 

The 2011 earthquake and tsunami created extensive turmoil in Japan’s financial markets, but the Bank of Japan’s policy response was very effective in preserving faith in the overall financial system. This prevented an earthquake-inspired crisis, but by the July– September quarter, as concerns about the debt crisis in Europe and the US intensified, volatility returned to international financial markets and Japanese stock prices fell sharply. Overseas investors, seeking a safe haven for their assets, began to purchase the yen, which was viewed as the most stable of the major currencies. As a 

