Section 1. Global Financial Crisis
Item 2. On the Eve of the Financial Crisis
In the automobile industry, rising crude oil prices increased manufacturing energy costs and the cost of materials, such as plastics, and, through rising fuel costs, put pressure on new-car sales. Crude oil prices began rising in 2005 in conjunction with higher energy consumption in emerging economies, and although there was a brief lull in mid-2006, prices began climbing again in 2007. The price for American West Texas Intermediate, a representative crude oil price indicator, reached a historical high of 80 U.S. dollars to the barrel in October 2007 and then continued mostly uninterrupted to more than 130 U.S. dollars to the barrel in June 2008.
The U.S. economy was showing signs of a quick recovery and market conditions remained favorable following the bursting of the IT bubble in 2000, but around the end of 2006, a major cause for concern came to light. This was the subprime loan crisis.1 In the summer of 2007, America's leading credit rating agencies announced that they were lowering the ratings of financial products that bundled subprime loans. As these loans were securitized and sold to financial institutions and investors around the world as financial products, and a serious problem surfaced and led to a global financial crisis.
Disorder in financial markets gradually cast a shadow on the U.S. real economy as a result of tighter restrictions on credit. In addition, the yen began rising against the dollar in currency exchange markets in the autumn of 2007, becoming yet another cause of deteriorating financial results for Japanese manufacturers on top of higher crude oil and raw material costs and the slowdown of the U.S. economy.
It was under these circumstances that in its consolidated results for fiscal year 2007 (ended March 2008), TMC reported global retail sales of 9.43 million units, a 4.7% year-on-year increase and net revenues of an all-time high of 26.289 trillion yen, a 9.8% year-on-year increase. Operating income was 2.27 trillion yen and net income was 1.717 trillion yen, both historical highs, but the rates of increase were just 1.4% for operating income and 4.5% for net income. The environment in which higher sales did not lead to higher earnings was becoming even more severe.
Starting in the second half of fiscal year 2007 (ended March 2008), the slowdown of developed country economies, particularly the United States, and the isolated rise of the yen compared to other currencies caused further harm to TMC's profitability. The impact was especially prominent in the fourth quarter when operating income from North America, a major source of earnings, fell into the red. North America's share of operating income by overseas region plunged from 57% for the previous fiscal year to 36%, a portent of the impending crisis.
The forecast for fiscal year 2008 (ended March 2009) consolidated financial results, released at the time of announcement of the financial results for fiscal year 2007 (ended March 2008), reflected the increasingly harsh business environment. TMC, in a forecast outlining reduced income and reduced profit, projected that net revenues would fall 4.9% year-on-year to 25 trillion yen. In addition, the high value of the yen was expected to trim operating income by 690 billion yen, brining it down 29.5% to 1.6 trillion yen, and net income was expected to decline by 27.2% to 1.25 trillion yen, both indicating a large expected drop in profit. Because of the subsequent outbreak of a global financial crisis and further increases in the value of the yen, however, TMC later had to make three major downward revisions to this forecast.