exports from asian to european countries. in particular, there seems to be not a small impact on china, which relies heavily on exports to european countries. second, the effects of financial contraction in europe, especially deleveraging of european financial institutions, are a matter of concern. while the presence of european financial institutions is not so large in japan and china, there are some other asian countries that rely bis central bankers ’ speeches heavily on those institutions. at this stage, as the pace of deleveraging by european financial institutions has been moderate and japanese financial institutions have partly been substituting such deleveraging, funding conditions of asian firms have not been deteriorating substantially. however, changes in europe might change the situation drastically. third, moves in international financial and capital markets. a decline in stock prices contains private consumption and other forms of economic activity through the negative wealth effect. changes in foreign exchange rates, for example, a substantial yen appreciation might, especially for japan ’ s economy, worsen corporate profits and put downward pressure on economic activity. in addition, it is very likely that a jittery market sentiment itself will make asian economic entities ’ sentiment cautious, thereby containing their spending. iv. japan ’ s and china ’ s efforts like that, the european debt problem has been affecting substantially both the chinese and japanese economies. therefore, for both china and japan, it is extremely important that the european debt problem will be fundamentally solved as soon as possible. toward achieving fiscal soundness and financial system stability, i believe it necessary to urge the eu to further accelerate their efforts. meanwhile, from a viewpoint of minimizing the spillover of the european debt problem to asia, first of all, each asian country has to make policy responses properly on both fiscal and financial fronts to cope with downward pressure on economic activity. in addition, in order to maintain the financial facilitation in asia, i believe there is not a small role japanese financial institutions should play. in fact, based on such judgment, japanese major banks have been actively providing loans. if those responses are smoothly carried out, a risk that economic entities ’ sentiment becomes substantially cautious could be reduced. of course, from a long - term perspective, it will be necessary to consider a case that, if by any chance, an extremely large negative shock emerges from europe. in asia, trading ties have been further deepened, along with the development of supply chains. it also means that, as revealed during the earthquake disaster in japan and the flooding in

a year - on - year basis partly because the increase in productivity and the restraint on labor costs by firms have absorbed the effects of the rise in commodity prices. the money market remains stable overall against the background of the bank ’ s provision of ample liquidity. in the capital markets, long - term interest rates rose somewhat toward the middle of 2004, but have been moving at around 1. 5 percent recently. stock prices have been generally firm with the ongoing economic recovery. the environment for corporate finance is becoming more accommodative on the whole, although it remains severe for firms with high credit risks. the lending attitude of private banks is becoming more accommodative, and the lending attitude of financial institutions as perceived by firms has been improving. the pace of decline in credit demand in the private sector is becoming somewhat moderate. under these circumstances, the rate of decline in lending by private banks has basically been diminishing. moreover, the fund - raising environment for firms in the capital markets through cp and corporate bonds remains favorable, and the amount outstanding of cp and corporate bonds issued continues to be above the previous year ’ s level. ii. conduct of monetary policy the bank has been conducting the quantitative easing policy with the outstanding balance of current accounts held at the bank as the operating target. in accordance with the current target range for the outstanding balance of “ around 30 to 35 trillion yen, ” the bank is providing ample liquidity to the money market. the bank has also made a commitment to maintain the quantitative easing policy until the year - on - year rate of change in the consumer price index ( cpi ; excluding fresh food, on a nationwide basis ) registers zero percent or higher on a sustainable basis. the bank ’ s commitment has contributed to stabilizing market participants ’ projection of future interest rates, and thus market interest rates have been stable. in this situation, firms have been able to raise funds at low interest rates. the commitment ’ s positive effects through interest rates on the economy will strengthen as corporate profits increase with economic recovery. with these policy effects in mind, the bank has firmly maintained its quantitative easing policy with the commitment based on the cpi. the bank has been making efforts to make credit intermediation in the market more diversified and efficient so that monetary easing effects permeate throughout the economy, and these efforts are expected to improve the japanese financial and capital markets in the long term. as part of such efforts, the bank started to purchase asset - backed securities (