miyako suda : the current situation of and outlook for japan ’ s economy and the conduct of monetary policy summary of a speech by ms miyako suda, member of the policy board of the bank of japan, at a meeting with business leaders, wakayama, 3 june 2010. * * * i. japan ’ s economy and prices and the conduct of monetary policy a. developments in financial markets 1. developments in global financial markets and the situation in greece the topic i would like to discuss today is the current situation of, and outlook for, japan ’ s economy and the bank of japan ’ s conduct of monetary policy. let me begin by looking at developments in global financial markets. following the unprecedented turmoil triggered by the failure of lehman brothers in september 2008, global financial markets regained stability from around the spring of 2009 due to various measures taken by governments and central banks around the world. the libor – ois spread, an indicator of counterparty credit risk, has narrowed to levels significantly below those seen before the lehman shock. recently, however, signs of instability have reemerged due to concerns over fiscal problems in some european countries, particularly greece, and uncertainty regarding financial regulation in the united states and europe. the crisis in greece has caused large fluctuations in stock prices and foreign exchange rates around the world, increasing investors ’ risk aversion and deepening the fiscal woes of other european countries. in what follows, i would like to review recent developments in global financial markets, focusing in particular on the situation surrounding greece. the greek debt crisis was triggered by a loss of confidence in greece ’ s official statistics and its ability to repay its debt. in october 2009, the new administration in greece announced that the country ’ s budget deficit in 2009 would be far greater than previously estimated. the significant revision gave rise to concerns about the reliability of greece ’ s official statistics and fiscal discipline, prompting a large rise in greece ’ s sovereign risk premium. in january this year, the greek government submitted to the european commission a three - year plan to cut its budget deficit, and in april, the 16 euro area member states agreed on a 30 - billion euro financial support package. at that stage, greece was still able to procure funds relatively smoothly through the issuance of government securities. however, greece ’ s sovereign risk premium increased rapidly from the end of april to early may, following a further revision to its budget deficit estimate, a sharp downgrading of greek government

car registrations – a consumption - related indicator – increased rather substantially by 6. 9 percent for january on a month - on - month basis, suggesting the possibility that the front - loaded increase in demand prior to the consumption tax hike is becoming pronounced. meanwhile, real exports for january declined by 2. 3 percent overall, presumably due to a drop in exports to china. indices of industrial production for january, which reflected these developments in domestic and external demand, are scheduled for release on february 28. according to the survey of production forecast in manufacturing released in january, production for january was expected to show relatively stronger growth led by production to meet domestic demand. b. prices regarding developments in prices, the year - on - year rate of increase in the cpi ( all items less fresh food ) for december 2013 climbed from the previous month to 1. 3 percent. through the latter half of 2013, rises in prices of energy - related items such as petroleum products – reflecting movements in crude oil prices and foreign exchange rates – contributed to the rise in prices. however, price increases have gradually been observed in other items recently, while private consumption has remained resilient, indicating that such increases are steadily becoming widespread. in fact, the year - on - year rate of increase in the cpi ( all items less food and energy ) rose to 0. 7 percent for december 2013, representing the strongest growth since august 1998. 2. outlook for economic activity in terms of economic activity, while domestic demand, particularly private consumption, is likely to maintain firmness as external demand is expected to increase – albeit moderately – a virtuous cycle among production, income, and spending is likely to be maintained. as for prices, whereas the upward contribution from price movements in energy - related items is likely to diminish gradually, the boosting effect of an improvement in the aggregate supply and demand balance accompanied by an economic recovery is expected to spread. consequently, the year - on - year rate of increase in the cpi ( all items less fresh food ), excluding the direct effects of the consumption tax hike, is likely to be around 1¼ percent for some time. as i mentioned, japan ’ s economy is likely to continue a moderate recovery as a trend, while it will be affected by the front - loaded increase and subsequent decline in demand prior to and after the consumption tax hike. for the time being, i will pay attention to the following points. bis central bankers ’ speeches a. the effects of the consumption tax hike