and deterioration, and financial crises, the process of adjustments will inevitably be deep. as i mentioned earlier, a prolonged period of worldwide high growth never witnessed before continued for several years in the mid - 2000s. in addition, inflation rates declined due to an expansion of production capacity resulting from the participation of emerging economies in the global market economy, and low interest rates continued in the environment of high growth and low inflation. in the process, various excessive activities, both economic and financial, were undertaken and " excesses " were accumulated. behind the rise of the u. s. subprime mortgage problem and the surge in crude oil and materials prices observed until this summer, there were global high growth and expansion in financial leverage. of course, there were some voices warning about the situation. however, given that the economy was in a favorable condition, it was difficult to accept such warnings as is often the case given the nature of human beings and society. the world economy is now undergoing a process of adjustment of various excesses that had been accumulated, to achieve more sustainable growth. under these circumstances, it is necessary to implement appropriate macroeconomic policies while maintaining financial system stability by injecting public funds into financial institutions in order to prevent the economy from falling into a deep adjustment phase or turmoil. although such policies have been implemented, losses incurred by financial institutions and their capital shortages tend to expand when a negative feedback loop between financial and economic activities is operating. hence, uncertainty remains as to the final amount of losses that need to be covered and of public funds injection required. the large losses that arise from adjusting accumulated excesses can only be covered by flows of income generated by daily economic activities, and this will inevitably take time. iii. financial conditions in japan let me explain financial conditions in japan as an extension to what i have said about the global financial system. financial markets in japan, which had remained stable relative to these in the united states and europe, have also drastically changed since the bankruptcy filing of lehman brothers. measured by the spreads between interbank funding rates and government bond yields, the situation in the japanese money markets remains comparatively favorable to date, but it seems that careful analysis of the possibility that pressures acting to depress economic activity from the financial side may increase in japan is becoming necessary. in the conduct of monetary policy, it is extremely important but nonetheless difficult to judge how accommodative or how tight financial conditions are in a country. to make an accurate judgment of financial conditions, the bank

these are the important challenges which japan ’ s economy could not accomplish during the 1990s and which have been carried over to the 21st century. i believe that, if not only the government but also financial institutions, private firms, and each and every citizen make efforts to derive and enhance the growth potential of japan ’ s economy, we can form the foundation for renewed economic development. the bank of japan will continue to make every effort on the monetary policy front to achieve price stability and sustainable economic growth, as well as to discharge its responsibility as a central bank from the viewpoint of financial system stability.