masaaki shirakawa : the turmoil in global financial markets and economic and financial developments in japan speech by mr masaaki shirakawa, governor of the bank of japan, at the kisaragi - kai meeting, tokyo, 5 november 2008. * * * introduction i am very privileged to have the opportunity to speak before such a large audience. as you all know, global financial markets are currently experiencing a type of turmoil not seen since the 1930s. strains in the markets have mounted significantly, especially since the bankruptcy filing of lehman brothers in september. it is difficult for a central bank to choose the right words to express this situation, but the blunt phrase " financial crisis " was used in the joint statement by major central banks released in october. the degree of strains in financial markets, although they have recently improved somewhat, has increased to a level that has obliged us to use such a strong phrase. the turmoil in financial markets that began in the summer of 2007 as well as its impact on economic activity were, at first, limited to the u. s. and european economies, but have since gradually spread to japan as well as to emerging economies. this global turmoil has now become the largest problem facing the world economy, although the degree of impact varies by country. in my speech today, i would like to first discuss developments in global financial markets and overseas economies, given that current developments in japan's economy are being overwhelmingly influenced by them. after that, i will discuss the outlook for japan's economic activity and prices, and then the bank of japan's conduct of monetary policy, including the reduction in the policy interest rate decided at the monetary policy meeting held on october 31. and lastly, i would like to touch on how a financial crisis should be dealt with and how, from a longer - term perspective, similar crises can be prevented in the future, based on our experience with the one that occurred in japan. i. developments in global financial markets and overseas economies i will begin by discussing developments in global financial markets and overseas economies. looking back, until recently the world economy enjoyed a sustained period of benign economic conditions. the statement released after the meeting of the group of seven ( g - 7 ) finance ministers and central bank governors in april 2007, for example, indicated, " although risks remain, the global economy is having its strongest sustained expansion in more than 30 years and is becoming more balanced. " all of you here are familiar with developments in the world economy since then

prices stabilize, while aggregate supply and demand conditions are expected to loosen, with real gdp growth falling short of the potential growth rate. on a fiscal year - on - year basis, the cpi ( excluding fresh food ) is projected to rise by around 1. 5 percent in fiscal 2008 and remain more or less flat in fiscal 2009. thereafter, it is projected to increase somewhat and register an increase in the range of 0. 0 - 0. 5 percent in fiscal 2010, as commodity prices are likely to rise gradually reflecting the recovery in overseas economies and the aggregate supply and demand balance in the economy is likely to improve moderately. what is important in the conduct of monetary policy when faced with a decline in the inflation rate is developments in medium - to long - term inflation expectations. in this regard, medium - term inflation expectations have barely changed during the recent period of price rises, and it is not anticipated in the current projections that they will change during the coming period of price decline. b. uncertainty regarding the outlook for japan's economic activity and prices in sum, the most likely outlook is that increased sluggishness in japan's economic activity will remain over the next several quarters, but in the longer run, the economy will return onto a sustainable growth path with price stability. however, this outlook is attended by a significant level of uncertainty. the first and the largest risk factor is the outcome of financial crises in the united states and europe. if the negative interaction operating between financial markets and economic activity in the united states and europe should worsen, this may lead to a further slowing in these economies and may further delay their recovery. if growth of the world economy slows as a whole due to a subsequent slowdown in emerging economies, not only will japan's exports decline but also the slowdown in the world economy may reduce business fixed investment by altering firms'expectations of an increase in global demand. the second risk factor concerns developments in energy and materials prices. it is assumed that, in the medium term, these prices will rise moderately, supported by growing demand especially in emerging economies. however, this assumption is, again, accompanied by uncertainty. if the current fall in these prices, which implies an improvement in japan's terms of trade, mainly reflects the slowing of the world economy, it should be borne in mind that this also implies a decrease in japan's exports. on the other hand, if commodity prices should surge again, inflationary pressures may increase globally, which could raise