down of new economic activities. those outcomes, together with the resulting higher levels of inflation would have kept sri lanka trapped in the vicious cycle. accordingly, through negotiations, the sri lankan authorities were able to convince the imf that sri lanka would commit itself to building its reserves, but would do so, while allowing the exchange rate to adjust according to economic fundamentals and market conditions, instead of forcing an artificial, sharp depreciation of the currency. the sri lankan authorities also took the view that lower tax rates would spur growth and ultimately increase revenues, and based on such view, they were able to convince the imf that it would be better to lower tax rates and encourage economic activity. subsequent economic outcomes have since confirmed the wisdom of both these moves by the sri lankan authorities! although this trio of major challenges have now been effectively addressed through the application of unconventional wisdom, sri lankan authorities realize that they must continue to practice innovation in order to reach their long term goals. at the same time, sri lanka must also preserve the country ’ s peaceful environment and political stability, in order to make these outcomes sustainable. in this regard, sri lanka is now facing a fresh challenge, where human rights advocates of the us and the west, are focusing on the last phases of the 30 year war on terror, and raising certain human rights issues and prescribing various “ foreign ” solutions to those perceived issues. in this situation too, just as conventional economists did not appreciate the practical benefits of the innovative economic strategies, theoretical human rights activists also do not seem to appreciate sri lanka ’ s strategy of ushering long lasting peace to its communities in a practical and effective manner, without inflicting further anxiety, pain and anguish on the people. sri lanka is a vibrant, practising democracy and a country with a 2500 year history, emerging out of a long and bloody conflict. it has the maturity and the ability to deal with issues confronting the country, in accordance with its own systems, culture and democratic traditions. so far, all sri lankans have been able to enjoy peace, by practising a hybrid system of restorative justice and rapid economic and political development. in that background, it is vital that the country is not pushed into “ foreign - grown ” solutions of international agencies and others, who unfortunately, sometimes appear to be influenced by certain human rights crusaders, who have been well - known terror activists in the past. it is also worthy to recall that, in its commitment to the

masaaki shirakawa : recent economic and financial developments in japan statement by mr masaaki shirakawa, governor of the bank of japan, concerning the bank's semiannual report on currency and monetary control before the committee on financial affairs, house of councillors, tokyo, 16 december 2008. * * * introduction the bank of japan submitted to the diet its semiannual report on currency and monetary control for the second half of fiscal 2007 on june 10, 2008 and that for the first half of fiscal 2008 on december 12, 2008. i am pleased to have this opportunity to present an overall review of the bank's conduct of monetary policy. i. developments in japan's economy japan's exports have decreased due to the slowdown in overseas economies. with the deterioration in corporate profits and households'employment and income situation, domestic private demand, particularly business fixed investment and private consumption, has weakened. in sum, japan's economic activity has been increasingly sluggish. indicators of production, employment, and private consumption have all been weak. the results of the bank's december tankan ( short - term economic survey of enterprises in japan ), which were released yesterday, also clearly indicated the severity of economic conditions in terms of business sentiment and fixed investment plans. on the price front, the three - month rate of decrease in domestic corporate goods prices has been large, mainly due to the drop in international commodity prices. the year - on - year rate of increase in the cpi ( excluding fresh food ) is around 2 percent against the background of the increase in prices of energy and food. cpi inflation is expected to moderate reflecting the declines in the prices of petroleum products and the stabilization of food prices. regarding the financial side, investors have become increasingly risk averse reflecting disruptions in global financial markets. as a result, funding conditions in the cp and corporate bond markets have tightened, as indicated by the wider credit spreads on cp and corporate bonds and the difficulty faced by firms in issuing either. moreover, an increasing number of firms, not only small but also large ones, have reported that their financial positions are tight and lending attitudes of financial institutions are severe. thus, financial conditions in japan are rapidly becoming less accommodative on the whole. there are risks to the outlook for economic activity and prices. global financial markets remain under intense strain, although there has been some improvement in money markets in response to the various measures taken so far by governments and central banks.