koji ishida : recent economic and financial developments speech by mr koji ishida, member of the policy board of the bank of japan, at a meeting with business leaders, tochigi, 11 march 2013. * * * i. economic activity and prices a. recent financial and economic developments 1. overview i would like to start by looking at recent developments in the global economy. the global economy plunged following the lehman shock in 2008, but moved subsequently toward recovery. since mid - 2011 however, it has decelerated following the outbreak of the european sovereign debt crisis triggered by the fiscal problem in greece. thereafter, as the debt problems in major economies such as spain and italy also worsened, the euro area economy entered a severe recession and the real gdp growth rate for the area turned negative in 2012. in addition, the growth rate declined for the chinese economy, which exports a great deal to europe, and emerging and commodity - exporting economies in general were seriously affected. in these circumstances, japan ’ s economy has inevitably undergone significant adjustments since summer 2012, such as in the form of a decrease in production and curbs on business fixed investment due to a drop in exports. the problems in the euro area have shown signs of stabilizing, reflecting progress made since the latter half of 2012 in establishing frameworks to avert a crisis. examples include the introduction of a program called outright monetary transactions ( omts ), through which the european central bank ( ecb ) purchases government bonds issued by euro area countries facing financial difficulties, and the start of the operation of the european stability mechanism ( esm ). in this situation, markets outside the euro area have begun to factor in the bottoming out of respective economies. the international monetary fund ( imf ) has projected that the global economy will recover in 2013 and 2014, having bottomed out in 2012. 2. european economy the euro area economy, which is considered to have triggered the global economic slowdown in 2012, remains in a moderate recessionary phase. private consumption in the euro area has been on a downtrend since 2011 against the backdrop of the debt problems. car sales have been particularly weak. looking at exports and production, exports to outside the area had been solid, primarily in germany with its competitive edge, owing in part to the depreciation of the euro to date. however, these exports have more recently shown sluggish growth due to the deceleration in the global economy. as a result

temporary in nature. let me now explain our assessment in greater detail, starting with the economic analysis. real gdp in the euro area grew by 0. 1 % quarter on quarter in the third quarter of 2011. at present, a number of factors seem to be dampening the underlying growth momentum in the euro area. they include moderate global demand growth and weak business and consumer confidence in the euro area. domestic demand is likely to be dampened by the ongoing tensions in euro area sovereign debt markets, as well as the process of balance sheet adjustment in the financial and non - financial sectors. at the same time, we continue to expect euro area economic activity to recover, albeit very gradually, in the course of 2012, supported by developments in global demand, very low short - term interest rates and all the measures taken to support the functioning of the financial sector. in the governing council ’ s assessment, substantial downside risks to the economic outlook for the euro area continue to exist in an environment of high uncertainty. they notably relate to a further intensification of the tensions in euro area debt markets and their potential spillover to the euro area real economy. downside risks also relate to the global economy, protectionist pressures and the possibility of a disorderly correction of global imbalances. with regard to price developments, euro area annual hicp inflation was 2. 8 % in december bis central bankers ’ speeches 2011, according to eurostat ’ s flash estimate, after 3. 0 % in the preceding three months. this decline was expected and reflects a downward base effect stemming from energy prices. inflation rates have been at elevated levels since the end of 2010, mainly driven by higher energy and other commodity prices. looking ahead, they are likely to stay above 2 % for several months to come, before declining to below 2 %. this pattern reflects the expectation that, in an environment of weaker growth in the euro area and globally, underlying cost, wage and price pressures in the euro area should remain modest. the governing council continues to view the risks to the medium - term outlook for price developments as broadly balanced. on the upside, the main risks relate to further increases in indirect taxes and administered prices, owing to the need for fiscal consolidation in the coming years, and possible increases in commodity prices. the main downside risks relate to the impact of weaker than expected growth in the euro area and globally. turning to the monetary analysis, taking the appropriate medium - term perspective, the underlying pace of monetary expansion continues