power to support economic activity of firms and households, the potential economic stimulus effects of low interest rates tend to increase as the economic environment improves. in october this year, the bank expressed again its aim to maintain the extremely accommodative financial environment and provide steady support for japan ’ s economy, and i will emphasize again today that the bank firmly maintains such a stance. the bank will thoroughly check the future developments in the economy and prices and take appropriate policy responses to bring japan ’ s economy back to a sustainable growth path with price stability. in terms of the effects of monetary easing, it is important to ensure the stability of financial markets. to ensure the stability of the financial markets is a responsibility as a central bank, and i will reemphasize that the bank is always prepared to act promptly and decisively if judged necessary to ensure the stability of financial markets. iv. responses to deflation in relation to the policy management, i will now describe the basic thinking on coping with the issue of deflation. as previously mentioned, the bank has been doing its utmost as a central bank to meet the challenge of getting out of the state of continued decline of prices, namely, deflation, and put japan ’ s economy back to a sustainable growth path with price stability, and made it clear to continue with such stance. to begin with, at the root of a continued decline in prices, there is a fundamental factor that demand is weak compared with the supply capacity of the economy as a whole. the starting point of the current price decline was the rapid contraction of financial and economic activities since the autumn of last year, and, as a result, the supply and demand balance deteriorated significantly. in order to deal with such situation, it is necessary to prepare an environment conducive to a sustainable expansion of final demand, such as business fixed investment and private consumption. in other words, on a policy front, it becomes critical to make households feel secure about their future and firms able to have expectations about the future growth. at the same time, as long as there will be no recurrence of the excessive booms in the united states and europe, it will be essential also for firms to convert their supply system into a new one that is in line with consumers ’ needs in a new era. as such, steady efforts on the part of the policy authorities as well as the private economic entities are necessary for coping with the issue of deflation, and such a process necessarily takes some

and the role of the bank of japan in ensuring stability and enhancing accessibility of the japanese financial markets. i. financial crisis in 2008 : the united states, europe, and japan in the past quarter - century, international funds transactions have expanded considerably amid economic and financial globalization. under these circumstances, the turmoil and dysfunction in the u. s. financial markets stemming from the failure of lehman brothers holdings inc. in the autumn of 2008 spread rapidly around the world, and global financial market conditions deteriorated significantly. particularly in the united states and europe, the concerns of market participants deepened over counterparty risk. against this background, the money markets suffered markedly increased strain, with liquidity drying up particularly for term funding and libor climbing sharply. for example, u. s. dollar and euro libor - ois spreads – which represent the premium for liquidity and counterparty risks in interbank markets – widened sharply after the financial crisis, showing a rapid heightening of tension in the money markets that deal with interbank transactions ( see “ u. s. dollar ” and “ euro ” in chart 1 ). with regard to funding conditions for firms in the united states and europe, downgradings of firms grew in number due to the significantly deteriorating environment for corporate profits after the failure of lehman brothers. this rapidly heightened uncertainty about the firms ’ ability to repay their debt. subsequently, credit spreads on u. s. and european corporate bonds, including those with high ratings, widened rapidly, and liquidity in corporate bond markets decreased significantly ( see “ united states ” and “ europe ” in chart 2 ). following the market turmoil, global financial markets generally regained stability from around the spring of 2009 due to bold policy measures taken by governments and central banks around the world. from january 2010, however, triggered by the fiscal problem in greece, european financial markets became unstable, as seen in the growing concerns about fiscal conditions in peripheral european countries and the financial soundness of european financial institutions. turning to japan, financial markets became unstable immediately after the failure of lehman brothers, affected by the turmoil in the global financial markets. recent developments in japanese financial markets, however, have been relatively stable. for example, in japan ’ s money markets, interest rates came under upward pressure after the failure of lehman brothers, but concerns over counterparty risk were limited to the transactions mainly with foreign financial institutions. thus, although the yen libor - ois spread also widened, the rise was relatively marginal compared to the u. s.