term growth expectations against the backdrop of domestic and overseas economic growth declining to a level lower than that realized before the current recession. as you can see, there are various risks to the outlook for the japanese economy both on the upside and downside. on balance, the bank's present assessment is that risks to the economy still remain greatly on the downside. in either case, the bank will continue to carefully examine economic developments, while paying due attention to various risks surrounding the economy. iii. developments in the financial environment in parallel with the pickup in the japanese economy that i have just explained, the financial environment, with some lingering severity, has increasingly been showing signs of improvement. i would now like to explain in some detail developments in japan's financial environment since last autumn. in japan, the acute pain caused by the financial crisis emerged markedly last autumn in securities markets such as the corporate bond and cp markets, in which large firms, banks, and institutional investors are major participants. after the collapse of lehman brothers, japan's stock prices fell sharply and defaults of corporate bonds started to be observed. in these circumstances, the excessive anxiety of market participants prevailed in the corporate bond and cp markets, and this made investors excessively cautious about taking on issuers'credit risk. in addition, market functioning deteriorated significantly : transactions decreased sharply, and the average market rates did not reflect the market fundamentals but rather were influenced strongly by specific circumstances of individual transactions. as a result, conditions for corporate bonds and cp issuance deteriorated significantly. in the corporate bond market, the credit spread ( the yield differential between corporate bonds and government bonds ) on bbb - rated corporate bonds was at around 1 percent in summer 2008 but expanded rapidly thereafter, and exceeded 4 percent around the end of fiscal 2008. in fact, almost no issuance of bbb - rated bonds was observed at the time. even the spread on a - rated corporate bonds, which have been recognized as medium - rated bonds, expanded and exceeded 1. 5 percent around the end of fiscal 2008, although it was at about 0. 7 - 0. 8 percent in summer 2008. there was almost no issuance of such bonds from october through november 2008. issuance rates on cp also rose substantially. in november, cp issuance rates ( 3 - month ) exceeded banks'lending rates ( in terms of the average contracted interest rates on new short - term loans ) for the first time, although this entirely unprecedented phenomenon was observed only in

##oyant mood. 1 securitized products are designed to transfer the credit risk associated with the loans extended by financial institutions to investors who have a higher capability than financial institutions to take on the risk. this allowed lower - income households that previously had been unable to afford to buy homes to become capable of making such purchases. at the same time, massive funds from investors, who sought higher returns without sufficient risk management, flowed into the securitized markets, thereby creating an overheating of the housing market. however, after for details on the role of securitized products, see " financial system stability and market confidence, " a summary of a speech given by kiyohiko g. nishimura at the japan society of monetary economics'spring annual meeting on may 16, 2009 ( available on the bank's web site at http : / / www. boj. or. jp / en / index. htm ). home prices began to fall, the risks that investors had previously ignored came to the fore ; this triggered the worsening of the u. s. subprime mortgage problem in summer 2007 and the subsequent asset bubble burst, which in turn led the world economy into severe recession from 2008. as a result, households and firms, as well as financial institutions, particularly in advanced economies, came to face the problem of balance - sheet adjustments : households and firms had to repay their excessive debt by curtailing their consumption and investment, while financial institutions had to dispose of their impaired loans and reduce their excessive leverage. the bursting of the asset bubble and ensuing increase in impaired assets at banks evolved into a financial crisis when lehman brothers collapsed last autumn. providers of funds became extremely cautious about counterparties'creditworthiness. this led to a sharp decline in transactions in the interbank market, where banks lend and borrow funds, as well as in the corporate bond and cp markets, where firms raise funds, and financial markets ultimately stopped functioning. the sharp deterioration in market functioning, together with firms'and households'excessively heightened anxiety, shrank global financial and economic activity, creating acute pain for the world economy. such pain began to wear off from around this spring, and global economic conditions have recently been improving for the following three reasons. first, the supply of ample liquidity by central banks, together with governments'measures to restore financial system stability, has proved effective, and global financial markets have been regaining stability. second, inventory adjustments have progressed markedly as a result of a