, and financial institutions and investors in other countries continued to purchase government bonds of greece and others with low yields, partly because they did not need to worry about the risk of foreign exchange fluctuations under the single currency euro. consequently, trade deficit countries increased borrowing from other countries more than their potential, and could not put a brake at an earlier stage. thus, in the case of greece, it became difficult for excessively issued government bonds to be repaid in full after all, and such situation surfaced as this time ’ s debt problem. there is also a problem of ballooning fiscal deficit after the lehman shock, which is common to japan, the united states, and europe excessive government debt has been accumulated as there was a weakness in the mechanism of monetary union in the euro area. on the back of the european debt problem, bis central bankers ’ speeches there is also an aspect of deterioration in fiscal conditions due to the burst of a global credit bubble, which is common to other advanced countries. looking back, due partly to the rise of emerging economies and financial innovation, the global economy had been enjoying high growth without inflation until after the mid - 2000s. that situation was also referred to as “ great moderation ”, and especially the u. s. and european economies became increasingly confident in their future. in the united states, however, the subprime mortgage problem aggravated and eventually led to the lehman shock and it became clear that no small part of the past high growth was nothing more than an unsustainable bubble. also in europe, during the phase of global growth, real estate investment surged, mainly in ireland and spain, and real estate prices plunged with the burst of a credit bubble. as a result, massive public funds were used for bailing out financial institutions and for an economic stimulus, and fiscal conditions deteriorated rapidly. also in the united states, fiscal deficit surged after the lehman shock, and there were moves that a rating agency downgraded the u. s. government bonds from the highest aaa last summer. in japan, while fiscal deficit has always been a grave problem due partly to rapid aging, fiscal conditions also further aggravated due to a series of economic stimuli after the lehman shock. in general, for fiscal reconstruction, namely, for reducing government debt, it is necessary not only to address the public finance itself on both the revenue and expenditure fronts, but also strengthen economic growth potential to secure tax revenue which is a resource to repay the debt. for example, in the cases of

hirohide yamaguchi : the european debt problem, japan ’ s economy, and monetary policy speech by mr hirohide yamaguchi, deputy governor of the bank of japan, at a meeting with business leaders, kagawa, 2 february 2012. * * * introduction thank you for giving me an opportunity to exchange views with administrative and business leaders in kagawa prefecture. today marks the 70th anniversary of the establishment of the bank of japan ’ s takamatsu branch. the branch has been operating steadily in this area for such a long time, thanks to your understanding and cooperation. i also express my gratitude. kagawa prefecture is a memorable place for me. i worked at the bank ’ s takamatsu branch as general manager for about two years since may 1996. during my stint, i visited frequently many local business managers and learned about local economic and financial conditions in detail. extraordinary managerial efforts i witnessed at that time still vividly remain in my memory. i will also never forget that i had delicious sanuki udon here many times. today, i will talk about the outlook for japan ’ s economy and its medium - to long - term challenges, and viewpoints of the conduct of monetary policy, while focusing on the european debt problem which is the greatest concern for the global economy for the time being. i. developments in overseas economies and the current situation of the european debt problem overseas economies have been on a decelerating trend, and are expected to recover moderately in the future let me start with the developments in overseas economies. following the lehman shock in 2008, the global economy was recovering, led by emerging economies, but the pace of recovery has been slowing since around the middle of last year. by region, the u. s. economy has been recovering moderately. recently, there have been some bright signs in consumption and production, and the market ’ s view has become somewhat optimistic. the foundations for sustainable growth remain vulnerable with the housing market in the midst of a protracted slump and the unemployment rate hovering at a high level of more than 8 percent. therefore, the pace of economic recovery is likely to remain moderate for the time being. the european economy has become increasingly stagnant as a whole on the back of the debt problem in greece and other countries, which continues to be a great concern for the global economy. i will later talk about that problem in detail. while emerging and commodity - exporting countries have been maintaining somewhat high growth rates as a whole, the