raising their selling prices while taking account of increases in costs such as wages. in order for the virtuous cycle between wages and prices to be realized, firms need to stably secure profits as a source for future wage hikes. as i pointed out earlier, there have been new developments in some firms'price - setting behavior. however, many argue that, unlike raw material costs, increases in wages and other indirect costs are difficult to pass on to selling prices. the bank needs to monitor developments going forward to see if changes in firms'price - setting behavior will become widespread. iii. the bank's conduct of monetary policy basic thinking on the conduct of monetary policy now, i would like to talk about the bank's conduct of monetary policy. as i have explained thus far, the bank's projection that underlying cpi inflation will increase is based on the expectation that the virtuous cycle between wages and prices will intensify. in this regard, it is encouraging to see that some aspects of firms'behavior have begun to shift more toward raising wages and prices. however, as i mentioned earlier, it is still unclear whether the virtuous cycle will intensify as expected. in this situation, the bank's basic thinking on the conduct of monetary policy is that it will patiently continue with monetary easing under the framework of yield curve control, aiming to support japan's economic activity and thereby facilitate a favorable environment for wage increases. conduct of yield curve control meanwhile, in order to patiently continue with monetary easing under the framework of yield curve control, it is necessary to strike a balance between the economic stimulus effects stemming from strictly keeping long - term interest rates at low levels and the resulting side effects. based on this thinking, the bank decided to modify the conduct of yield curve control at the monetary policy meeting held last week. specifically, while the bank maintained the target level of 10 - year japanese government bond ( jgb ) yields at around zero percent, it decided to conduct yield curve control with the upper bound of 1. 0 percent for these yields as a reference and to control the yields mainly through large - scale jgb purchases and nimble market operations. operations through which the bank offered to purchase an unlimited amount of 10 - year jgbs at 1. 0 percent every business day were ceased. these decisions were made because, with extremely high uncertainties surrounding economies and financial markets at home and abroad, the bank judged it appropriate to increase the flexibility in the conduct of

- digit inflation rates, such as russia, indonesia, and saudi arabia. the fact that inflation rates are increasing worldwide gives rise to the following questions. was the high world growth during the past several years sustainable? were sufficient macroeconomic policy measures taken? in fact, the continuance of an extremely accommodative financial environment worldwide has often been referred to as global excess liquidity or a savings glut. however, since the turn of the year, especially during the past several months, an increasing number of countries are shifting their monetary policy in a more restrictive direction. whether sustainable world growth with price stability is attainable through appropriate macro - economic policy measures applied in various parts of the world has much bearing on the ability of japan's economy to realize the outlook which i have referred to earlier. but, i must say, every country is confronted with difficult tasks. in the united states, the economy faces with the difficult issues of stagnation, inflationary risks, and the problem in the financial system. in the case of emerging countries, an increasing number of countries are facing the issue of balancing their policy objectives such as sustained high growth and price stability with the management of a de facto fixed foreign exchange system. in any event, the key issue is whether a sustainable pace of world growth can be achieved though with some moderation in the rate of growth. i will now turn to discuss developments in global financial markets and in the u. s. and european economies, which are the second factor casting uncertainty over japan's economy. global financial markets have been unstable as a result of the subprime loan problem. the nature of this problem, however, seems to have evolved over time. in the beginning, the values of various securitized products, including those packaged with subprime mortgage loans, declined. as a result of this, financial institutions incurred large losses and their capital decreased. confronted with this situation, financial institutions have tightened their credit standards and this has exerted downward pressure on economic activities. currently, the stage of realizing losses on securitized products has almost been completed. however, reflecting sluggishness in the economy, rates of delinquency on housing loans as well as commercial property loans and consumer loans have been increasing, and the effects of the decline in financial institutions'asset quality on the economy are becoming a concern. it is still not clear when and how the negative feedback loop between capital markets, asset prices, and the real economy