>Repetitive Pattern of Global Financial Market Turbulence

Summary
■ How should global financial market turbulence be understood?: In our main scenario we anticipate that, while Japan’s economy will momentarily slow in 2H10, it will continue to expand at a moderate pace, supported by recovery of the world economy. For this report, we closely reviewed our risk scenario and examined the history of global financial crises over the last hundred years or so to study the reasons for the repeated turbulence seen in global
financial markets in recent years. This examination led us to identify a pattern where (1)
financial crises are followed by (2) the expansion of fiscal deficits and (3) increased inflationary
pressure. Recent global risk factors (new financial regulations of the Obama administration,
European sovereign risk, concerns of monetary tightening in China) can be placed within this
framework without exception. To conclude, the risks that are currently shaking global financial
markets are not a passing issue but are expected to smolder over the medium and long term
as disruptive factors for the world economy.

Introduction of new financial regulations in the US, European sovereign risk, inflation in China, and higher commodity prices (read in report)

■ Examination of four risks facing the global economy: Building on the study referred to above, we present a multifaceted examination of the following four risks. First, should the
leverage of US financial institutions decrease 10% with the introduction of new financial
regulations by the Obama administration, US GDP would decline 2.8%. Second, European
sovereign risk has the potential of triggering global financial uncertainties. Third, should
inflationary pressure accelerate in China, the world economy may experience a hard landing.
Fourth, should commodity prices increase (the possibility has currently diminished), terms of
trade may worsen for Japanese companies. Land mines are buried throughout the world
economy, and any one of them may go off at a moment’s notice. In conclusion, Japan’s
economy is exposed to a range of downside risks, and its recovery is expected to be weak.

To read the full report: MARKET PATTERN