of the ongoing financial crises in the united states and europe on overseas economies and on japanese financial conditions. ii. the financial crises in the united states and europe and their impact as you all know, the current financial crises stemmed from the emergence of the u. s. subprime mortgage problem. since then, the severity of the situation has intensified with pessimisms rising and falling in a repetitive pattern. in particular, the situation changed drastically just after the bankruptcy filing of lehman brothers, which led to a continuation of the intensified strains in global financial markets. looking back, the problem surfaced as " liquidity constraints " when conduits and aggregators of securitized products and financial institutions faced difficulties in raising funds, which were triggered by declines in prices of securitized products backed by subprime mortgages. the next stage was a development of the " credit crunch " ; losses incurred by financial institutions that possessed a large amount of securitized products expanded, and their capital bases were impaired. as a result, financial institutions tightened their credit standards and their lending attitudes, and this started to exert strong downward pressure on the economy. and now we face the current situation, where the negative feedback loop operating between financial and economic activities has intensified. delinquency rates of not only mortgage loans but commercial real estate loan and consumer loans have risen reflecting the weaker u. s. economy. consequently, capital bases of financial institutions have been further impaired, and their lending attitudes have become even tighter. in addition, firms'fund - raising conditions in the markets have deteriorated, as seen in the difficulty faced by firms in issuing cp and corporate bonds and the extreme rise in issuance rates. they have ultimately had an adverse impact on economic activity – the emergence of a negative feedback loop operating between financial and economic activities. meanwhile, the federal reserve has lowered its target for the federal funds rate from 5. 25 percent to 1. 0 percent since last september. in spite of this monetary easing, the issuance rates of corporate bonds have risen compared with the level observed in the summer of 2007. in addition, we can point out the worldwide propagation as one of the features of the current financial crises. there were some failures of major financial institutions in the united states following the bankruptcy filing of lehman brothers, and failures started to be seen also in europe. furthermore, the financial crises in the united states and europe are starting to affect emerging economies, and the inflow of funds to these economies has decreased

world output is projected to fall substantially to 2. 2 percent. this is significantly lower than the world growth of around 5 percent registered for four years in the mid - 2000s. the timing of the recovery in overseas economies depends on several prerequisites for recovery, and with regard to the u. s. economy the key questions are how adjustments in the housing market will progress and when the financial system will regain stability. i must admit that the timing of the recovery in the growth rate of overseas economies as a whole is highly uncertain, but given the current severe situation it seems appropriate to assume that the growth rate of overseas economies taken as a whole is likely to show a clear recovery only after the middle of 2009. as overseas economies are expected to continue to face a difficult situation, japan's economy, which recorded negative growth in the second and the third quarter of this year, is likely to continue to show increased sluggishness over the next several quarters. the primary reason why the bank takes this view is that the effects of developments in overseas economies and of the turmoil in global financial markets, which i mentioned earlier, have been steadily spreading to japan's economy. i will elaborate on this later. the price situation has also changed significantly. looking back to about a year ago, the year - on - year rate of change in the consumer price index ( cpi ) for all items excluding fresh food was around 0 percent, but then rose at a rapid pace, especially in petroleum products and food, due to the pass - through of higher commodity prices, and reached 2. 4 percent this summer. however, most recently it began to decline due to the drop in commodity prices. given recent developments in commodity prices, it is projected to fall at a rapid pace going forward. the major factor behind the drastic change in the trend of the cpi is changes in import costs. in addition, changes in aggregate supply and demand conditions and in the expected inflation rate also affect prices. aggregate supply and demand conditions will likely ease, as growth in real gdp is expected to continue to fall short of the potential growth rate for the next several quarters. although it depends on developments in prices of petroleum products and materials, the rate of change in the cpi may, for a brief period, turn negative in fiscal 2009. bearing in mind these developments in japan's economy, i will now move on to the factor that i regard as most important when discussing future developments in japan's economy and overseas economies – the impact