masaaki shirakawa : japan ’ s economy and monetary policy speech by mr masaaki shirakawa, governor of the bank of japan, at a meeting held by the naigai josei chousa kai ( research institute of japan ), tokyo, 29 january 2010. * * * introduction i am privileged to have the opportunity to speak before such a large audience today. thinking back, this time last year, the global economy and financial markets were in the midst of a rapid and large decline, and i think many business managers were seized by the fear that no bottom was in sight. policy makers at home and abroad also tackled the situation with a sense of nervousness that one wrong policy step might result in a 1930s - style great depression. fortunately, one year on, today, as a result of the intense efforts of private firms and the prompt implementation of various unconventional policy measures by governments and central banks around the globe, the downturn of the global and japanese economies has been brought to a halt and activity has started to pick up. while economic conditions are improving, this improvement to a great extent owes to the support provided by the various policy measures, and the level of economic activity in advanced economies still remains below that prior to the lehman shock. i imagine that, from the perspective of business managers, the “ fear of no bottom in sight ” may have gone, but the “ anxiety of no future in sight ” may remain significant. today, i would like to talk about recent financial and economic developments at home and abroad, the thinking behind the bank ’ s conduct of monetary policy, and medium - to long - term challenges for japan ’ s economy. i. developments in the global economy the mechanisms underlying the downturn and the recovery while the main topic of today ’ s speech is japan ’ s economy, in the short - term, economic conditions in japan will greatly depend on developments in the global economy, as has been the case in the past year. as you are well aware, the global economy, sparked by the failure of lehman brothers in the autumn of 2008, faced a panicked contraction of financial and economic activity stemming from a liquidity crisis. as we all know, the most basic premise for economic transactions to take place is the confidence that counterparties will honor their obligations. however, following the failure of lehman brothers, confidence among financial market participants in counterparties collapsed and fund providers such as financial institutions and institutional investors became extremely cautious regarding the creditworthiness of their counterpart

activation of the demand for loans and the parallel easing of lending conditions as applied from the banking system. bank of albania deems that banking system should reveal more visionary in assessing potential sectors of economic growth and to take a more active role in encouraging the economic activity. annual inflation in february 2010 pointed to 4. 4 %, exceeding by 0. 4 percentage points the upper limit of the bank of albania target ’ s tolerance. the annual average inflation pointed to 2. 6 %. the recent developments of inflation have reflected the statistical impact of the comparison to a relatively low prices base in 2009, the more full transmission of exchange rate depreciation on consumer prices and the administrative increase of energy, since january 2010. the later factor provided an effect of about 0. 5 percentage points on inflation level, being the main reason of exceeding the level of 4 %. on the other side, the increasing tendency of food goods inflation is owed to the global conjuncture of goods prices, which is revealing a gradual monthly increase since the half of 2009. our analysis recommends that the increasing trend of inflation owes mainly to supplying factors, which are estimated to manifest an uneven nature and a short - term action in time. the bank of albania expected these developments, being factorised on our projections regarding inflation and communicated timely and in terms of transparency to the public. in medium term period, the growth under potential of the albanian economy owing to the slowdown of the domestic and external demand, shall establish an environment of low inflationary pressures, which are expected to balance the pressures deriving from the supply direction. this assessment is also supported by the sustained developments and at low historic rates of the long - term component of non - tradable goods inflation, as the most directed transmission of inflationary pressures generated from the internal demand in economy. the rates of both key inflation and of the non - tradable goods in february pointed to 1. 1 and 2. 3 %, respectively. throughout the discussions on the current and expected economic developments, the supervisory council of the bank of albania concluded that the inflationary pressures balance in medium term horizon is in line with the bank of albania inflation target, notwithstanding the latest tendencies of consumer prices ’ inflation. the assessments regarding the demand slowdown and the increase of negative production gap, the more controlled development of exchange rate and, the equilibrated expectations of economic agents about inflation, are factors which shall condition the development of inflation within the target of the bank of albania. at the conclusion