the deterioration in the functioning of the u. s. and european markets for securitized products has remained significant and strains in money markets have persisted. moreover, financial institutions have increasingly been tightening their lending standards. against this background, the global economy – including the u. s. economy, which has been decelerating even more clearly – has continued to be exposed to downside risk. at the same time, the risk of inflation has been increasing globally, as prices of crude oil and other international commodities have been rising substantially. the bank considers it necessary to continue to carefully monitor developments in overseas economies and global financial markets as well as the effects of the rise in materials prices. regarding prices, the three - month rate of change in the domestic corporate goods price index has been positive, mainly due to the rise in international commodity prices. the yearon - year rate of increase in the cpi ( excluding fresh food ) has been rising since around the end of last year, and it has been around 1 percent lately. as for the outlook, it is projected to continue to be positive due to the rise in prices of petroleum products and food products in a situation where overall supply and demand in the economy are more or less balanced. given that the current increase in the cpi is the highest in 15 years – if we disregard fiscal 1997, when retail prices rose due to the rise in the consumption tax – and that the prices of daily necessities are rising markedly, close attention should be paid to the effects of price developments on consumers'inflation expectations and the price - setting behavior of firms. ii. conduct of monetary policy and disposal of stocks purchased from financial institutions as i have explained, the outlook for economic activity and prices is highly uncertain at present. in this situation, the bank considers that it is not appropriate to predetermine the direction of future monetary policy. based on a thorough examination of the economic and price situation as well as the market situation both at home and abroad, the bank will carefully assess the future outlook for economic activity and prices, closely considering the likelihood of its projections as well as relevant risk factors, and will implement its policies in a flexible manner. the bank has been appropriately providing liquidity through money market operations. as a result, despite the continued disruptions in global financial markets, japan's money market has been stable, unlike its u. s. and european counterparts. the bank will continue to carefully monitor market developments and to ensure, via appropriate money market operations, the

to 12 percent, well above regulatory minimums. on the liquidity side, the sense of abundant liquidity persistently remained, as was evidenced by very low libor - ois spreads and the narrow bid - ask spreads for complex securitized products. however, since then, the landscape has changed in a way which was almost unthinkable. of the twenty banks, more than half have received injections of capital from their government. many banks have also faced liquidity difficulties, as raising funds in money markets became restricted reflecting the sharp drop in market liquidity. some even have experienced outflows of deposits. why did both market participants and authorities let their guard down against impending risks? why couldn ’ t they recognize the problems beneath the surface and take mitigating actions? let me raise three facets which i believe are relevant. first, the careful assessment of both funding and market liquidity is essential in today ’ s financial markets. this has two dimensions. one aspect is the interaction between liquidity and capital. for example, with regard to complex products such as certain securitized instruments, pricing, and as a result, necessary levels of capital to cover risks, are dependent on both market and funding liquidity. due to their limited market size, when market liquidity drops, prices fall rapidly, putting pressure on banks ’ earnings and capital levels. the shortage of capital then constrains the market - making activity of key dealers, further reducing market liquidity. required capital levels are strongly dependent on the assessment of market liquidity risk, not just the underlying credit risks. there is also the risk emerging from crowded trades, where market participants accumulate similar positions in benign market conditions. when market conditions deteriorate, everyone rushes to close their positions, exacerbating market strains further, hence the fall in prices. the second dimension is the risk of liquidity mismatches when short - term funds cover long - term assets. although this is fundamental risk of the banking business, it seems to have been underestimated. before the crisis, market participants assumed that cp and interbank markets would always function and would provide access to sufficient liquidity. this led to the build - up of large liquidity mismatches, for example in sivs. they also believed in the valuation of aaa - rated assets and assumed little risk was involved. they expected that, when cash liquidity was needed, they could promptly sell such assets regardless of the complexity or the size