not only as production bases for the leading economies but also as a huge market for the latter's own products. given this increased presence in the global marketplace, emerging economies are now faced with a marked decrease in internal demand due to declining exports reflecting a downturn in the u. s. and western european economies and downward pressure from the financial side as a consequence of financial crises in the united states and western europe. with the widespread use and popularization of advanced information and communications technologies, these developments are taking place at a speed not imaginable in the past. as a manager of a manufacturing firm has stated, " demand has evaporated in a market where, until recently, supply could not keep up with the increase in demand. " with the clear deceleration in growth of emerging economies, exports to them from the united states and western europe are decreasing, adding further downward pressure on economic activity there. and this is causing in turn a further decline in exports from emerging economies, subsequently decreasing internal demand in these economies. currently, there are two adverse feedback loops operating globally and leading to a sharp deterioration in world economic conditions : one where a decrease in production, income, and expenditure takes place in a spiral with a decrease in exports as a starting point, and another where negative developments in financial and economic activity mutually reinforce each other. confronted with a sharp global deterioration in financial and economic conditions, governments and central banks have taken various measures. to alleviate the economic downturn, considerable monetary easing and fiscal stimulus have been enacted in many countries. to alleviate the financial crisis, central banks in various countries are providing funds not only in their own currency but in u. s. dollars as a concerted action. governments are placing troubled financial institutions under their control, injecting public funds, expanding their deposit insurance schemes, and insuring the liabilities of financial institutions. in spite of these successive expeditious measures taken by governments and central banks, there are still uncertainties as to how the financial crises in the united states and western europe will be resolved and how the world economy will recover. with the adverse feedback loop operating between financial and economic activity, losses incurred by financial institutions and the amounts of capital that need to be raised tend to increase as time passes, and it is not clear whether the actions taken so far are sufficient to deal with the problem. for the financial system to regain stability, the amount of losses that financial institutions will incur needs to be clarified and the institutions need to

around 2003, rose at a rapid pace from around the end of 2007 reflecting increases in the prices of petroleum products and food due to the surge in commodity prices, and reached 2. 4 percent last summer. thereafter, it began to decline at a rapid pace reflecting a significant drop in commodity prices, and recorded 1. 0 percent in november 2008. looking ahead, it is expected to continue its sharp downtrend and turn negative due to increasing slackness in domestic supply and demand conditions in addition to the declines in the prices of petroleum products and the stabilization of food prices. the cpi inflation rate is projected to record a decline of around 1 percent in fiscal 2009. thereafter, the rate of decline is expected to diminish gradually through fiscal 2010 as the economy returns to a sustainable growth path. given that the cpi inflation rate will likely remain negative through fiscal 2010, one question that may be raised is whether this decline in prices will lead to a deflationary spiral – a situation in which a decline in prices induces a further decline, thereby accelerating the pace of decline and at the same time adversely affecting economic activity. if households expect wide - ranging price declines, they will reduce consumption, and this in turn will accelerate the decrease in demand. if firms expect their competitors to reduce prices on a broad range of products, they have no choice but to reduce their prices, and this may decrease firms'profitability further. however, the most important factor in assessing whether a deflationary spiral will materialize is not the short - term inflation expectations, which have been affected by the rapid changes in commodity prices, but developments in the medium - to long - term inflation expectations of households and firms. during the last twelve months, they have remained mostly unchanged, little affected by last year's rise or the recent rapid decline in the inflation rate. if the inflation rate remains negative for a protracted period, however, there is a risk of a gradual decline in medium - to long - term inflation expectations. future developments in medium - to long - term inflation expectations should therefore continue to be monitored closely. iv. conduct of monetary policy next, i will talk about the bank's conduct of monetary policy. as i said earlier, economic conditions in japan have deteriorated significantly. in response to the economic situation and its weaker prospects, the bank reduced its policy interest rate to 0. 3 percent from 0. 5 percent at the end of october 2008, and reduced it again to 0. 1 percent in december