percent in the short run depending on developments in crude oil prices, but is expected gradually to rise in the longer run. however, the pace of increase is likely to be moderate, given that the sensitivity of prices to changes in the output gap is declining due to factors such as economic globalization and deregulation. the year - on - year rate of increase in the cpi is expected to be slightly above 0 percent in fiscal 2007 and around 0. 5 percent in fiscal 2008. v. upside and downside risks to the outlook for economic activity i have so far outlined the most likely projection for the next two years or so. however, the economy constantly faces various risks, and due attention should be paid to the possibility that economic activity and prices might deviate from this projection should particular risks materialize. in the april 2007 outlook report, we pointed out the following as upside and downside risks to the outlook for economic activity : developments in the global economy ; supply and demand conditions for it - related goods ; and possible larger swings in financial and economic activity. let me elaborate on each risk. the first risk concerns developments in the global economy, which is expected to keep expanding with momentum being gained across a wide range of economies. in the united states, adjustments in the housing market, including problems in the market for subprime mortgage debt, are still ongoing, and some leading indicators of business fixed investment have been showing somewhat weak developments. if adjustments in the housing market turn out to be greater than expected or business fixed investment weakens, economic growth may decelerate further. on the other hand, there is a risk that inflationary pressures in the united states may persist longer than expected, given that the rate of change in the core cpi has been somewhat elevated reflecting higher utilization of resources. if inflationary pressures do not subside, there is a risk that not only the u. s. but also the global economy and financial markets may be adversely affected, for instance, through the reaction of long - term interest rates and foreign exchange rates to this situation. in china, there is an upside risk of the economy growing faster than expected, particularly fixed asset investments and exports. whether this risk can be reduced and the chinese economy can realize stable growth even after the 2008 olympic games in beijing should be the focus of attention. the second risk concerns supply and demand conditions for it - related goods. inventory adjustments of it - related goods are continuing, and this seems to be the result mainly of specific domestic

economic globalization. another characteristic of the current economic expansion is that the financial environment has continued to be extremely accommodative, and this has been supporting private demand. this accommodative financial environment, together with the expansion of the global market and the progress in adjustment of excess production capacity mentioned earlier, has also underpinned the increase in business fixed investment. interest rates have been very low relative to economic activity and price conditions. for instance, comparison of the real gdp growth rate with the real short - term interest rate – although the latter varies depending on how the expected inflation rate is estimated – shows that while the gdp growth rate has been around 2 percent, the real short - term interest rate has been in the range of around 0 - 0. 5 percent if the actual year - on - year change in the cpi is used as the expected inflation rate. the lending attitudes of financial institutions have been positive reflecting expansion of risk - taking capacity as a result of improvement in their financial condition, and in this situation, the amount outstanding of lending by private banks has been increasing. in sum, the financial environment continues to be accommodative, both in terms of interest rates and availability of funds. the yen in terms of the real effective exchange rate has been moving at around its lowest level since the 1985 plaza accord, and this has been supporting growth in japan's exports. increases in asset prices, such as a more widely observed upturn in land prices, particularly in major cities, also seem to be exerting upward pressure on private demand. iv. outlook for japan's economy next, i would like to elaborate on the outlook for japan's economy based on the assessment of the current economic situation that i have described. from fiscal 2007 through fiscal 2008, japan's economy is likely to continue its sustained growth of around 2 percent, somewhat above its potential. given that the expansion of the global market and the accommodative financial environment – the two distinctive features of the current economic expansion – are likely to continue, the virtuous circle of production, income, and spending is expected to remain intact. in the corporate sector, business fixed investment is expected to keep increasing as exports continue to rise and corporate profits remain high. according to the march tankan, firms'business fixed investment plans for fiscal 2007 are strong for initial estimates. as for the household sector, household spending is expected to follow a moderate upward trend as the positive influence of the strength