hirohide yamaguchi : some remarks on the financial crisis over the past year speech by mr hirohide yamaguchi, deputy governor of the bank of japan, at the 4th annual euromoney japan capital markets congress, tokyo, 18 september 2009. * * * introduction i am honored to be invited to speak today at the fourth annual euromoney japan capital markets congress. the collapse of lehman brothers one year ago triggered unprecedented disruptions in the global financial markets. fortunately, financial conditions have improved recently to a great extent, but they have not yet fully recovered from the crisis. today, by looking back on the financial and economic developments in the past year, i will provide some of my impressions of those developments. i. economic and financial developments after the collapse of lehman brothers the global financial markets changed drastically after the collapse of lehman brothers in september 2008. market participants became increasingly cautious about taking counterparty risk, causing trading volume to decrease sharply and market liquidity to decline significantly. credit spreads widened and the prices of financial products, including securitized products, plunged. consequently, financial institutions experienced business difficulties or failed one after another in many countries, thereby aggravating financial system concern. credit provisions from financial institutions to firms and households declined markedly, leading to a global credit contraction. confidence, which is the most crucial element in the financial system and markets to function smoothly, was virtually lost. meanwhile, economic conditions deteriorated simultaneously and rapidly around the globe. final demand – namely, housing investment, private consumption, and business fixed investment – plunged, leading to large - scale adjustments in inventory and production. this deterioration in economic conditions, together with a spread of anxiety among firms and households, exacerbated the malfunctioning of the financial system, and in turn deteriorated economic conditions further, causing a downward spiral – the emergence of the so - called adverse feedback loop between financial and economic conditions. also in japan, the functioning of commercial paper and corporate bond markets was impaired, and strains in japan ’ s short - term money markets increased as reflected in a rapid expansion of the libor - ois spreads. nevertheless, the stress imposed on financial markets and the financial system in japan after the collapse of lehman brothers was low relative to that in the united states and europe because financial institutions in japan had little exposure to securitized products. however, the slowdown in economic growth was rapid in japan, compared with that in the united states and europe. against a backdrop of a global

in accordance with the guideline for money market operations decided at the monetary policy meeting held on april 30. the outstanding balance of current accounts is recently moving at around 25 - 27 trillion yen. under these circumstances, the overnight call rate continues to hover at very close to zero percent. longer - term interest rates remain steady at low levels. yields on long - term government bonds declined and were temporarily moving at the 0. 5 - 0. 6 percent level, as banks and institutional investors have further increased investment in government bonds since the start of the new fiscal year. yield spreads between private bonds ( bank bonds and corporate bonds ) and government bonds are contracting further due mainly to the increase in corporate bond investment by institutional investors. stock prices plunged temporarily toward the end of april reflecting uncertainty regarding the domestic economic outlook and concern over the worsening supply - demand situation in the stock market, but they have since recovered following the recovery in european and u. s. stock prices. the nikkei 225 stock average is recently moving at around 8, 000 yen. in the foreign exchange market, the yen appreciated reflecting the ongoing weakness of the u. s. dollar due mainly to concern about increasing fiscal deficits and current account deficits in the united states. the yen is currently traded in the range of 115 - 118 yen to the u. s. dollar. with regard to corporate finance, private banks remain cautious in extending loans to firms with high credit risks while they continue to be more active in extending loans to blue - chip companies. recently, their lending attitudes seem to be becoming slightly more accommodative in areas such as interest margin charges. meanwhile, the lending attitudes of financial institutions as perceived by firms, particularly small ones, remain severe. in the corporate bond and cp markets, the issuing environment for firms with high credit ratings continues to be accommodative, and the environment for firms with relatively low credit ratings seems to be improving slightly. credit demand in the private sector continues to follow a downtrend mainly because business fixed investment is at low levels and firms are continuously reducing their debts. amid these developments, private banks ’ lending continues to decline by about 2 - 3 percent on a yearon - year basis, but the rate of decline is contracting slightly. the amount outstanding of corporate bonds and cp issued is moving at around the previous year ’ s level. meanwhile, according to business surveys, financial positions of firms, particularly those of small firms, remain severe. the year - on -