##ing economies have been shifting away from accommodative monetary policies, while in china, the government has implemented measures to curb the overheating of the real estate market. however, if capital from industrialized economies – which are persisting with accommodative monetary policies – continues to flow into these countries and thereby exacerbates overheating in asset markets, it could boost growth. these developments could then pose an upside risk to japan ’ s economy by means of an increase in exports. such developments would not be wholly desirable since overheating in emerging and commodity - exporting economies would inevitably lead to a tightening of policies, which might then pose a downside risk to japan ’ s economy. when considering downside risks, the growing instability in global financial markets warrants attention. the fiscal problems in greece and some other european countries will not only lead to a deterioration in domestic demand in these countries as a result of fiscal austerity measures, but also exert downward pressure on european economies as a whole in a number of ways. these include fiscal consolidation in other countries, as they attempt to avoid a similar fate ; the weakening of the financial intermediary function of financial institutions that own sovereign debt issued by countries stricken by the crisis ; and a decline in the propensity to consume, as a result of uncertainties surrounding overall markets. the direct impact on japan ’ s economy is likely to be minimal, as its lending to countries in the region is inconsiderable, while exports to europe account for only about 10 percent of the total. however, for china and the united states – the major destinations of japanese exports – europe accounts for about 20 percent of exports and japan could, therefore, be indirectly affected. furthermore, it is necessary to be aware of downside risks, stemming from the effects of the yen ’ s appreciation against the euro, on japan ’ s export competitiveness, as well as the impact of financial market instability on firms ’ funds procurement. c. price developments i will now move on to prices. commodity prices, which have a major impact on price developments in japan, have been on a rising trend, reflecting high growth in emerging economies. as a result, recent import prices have been about 10 percent above year - ago levels, after having plunged more than 30 percent year on year in summer 2009. in addition, the domestic corporate goods price index ( cgpi ), which measures fluctuations in prices of goods traded between firms in japan

through this measure. on june 25, the bank announced it had selected 66 counterparty financial institutions for fund - provisioning through public application. not only major banks, but also a wide range of other financial institutions, including regional banks, became counterparties. each counterparty submitted its plan for strengthening the foundations for economic growth to the bank, which is currently evaluating each counterparty ’ s eligibility based on the amount of lending and investment carried out under the plan in the april - june quarter of 2010. based on the evaluation, the bank will determine how much it will lend in its first disbursement. let me next explain the background to the bank ’ s decision to introduce this fund - provisioning measure. iii. strengthening the foundations for economic growth a. deflation as i mentioned earlier, japan is experiencing deflation. price instability, including deflation, has various negative effects on the economy and society. for instance, it reduces the efficiency of resource allocation, restrains economic activity by making economic outlook uncertain, and distorts income distribution by changing the real value of contracts, assets and liabilities, which are typically in nominal terms. in addition, there are problems particular to deflation. for example, it has been pointed out that debtors with a high propensity to consume tend to restrain their spending when the real value of their debt rises, weighing down the economy. in addition, due to the zero bound on nominal interest rates, real interest rates do not fall to the level required by the level of economic activity. declining inflation rates are a trend shared by all major economies around the world. it is only in japan, however, that prices in terms of the cpi excluding food and energy ( the corecore cpi ) have been falling. the main reason for this is the large output gap, which has remained consistently negative since the second half of the 1990s. what is more, the gap has been much larger than in other major economies. this is attributable to the excess supply capacity that has not been adequately adjusted relative to the level of domestic demand, which has stayed sluggish since the bursting of the economic bubble. weakness in domestic demand was prolonged by the delay in balance - sheet adjustments by various economic entities and the lack of forward - looking expenditure since the bursting of the economic bubble. in particular, the delay in the disposal of impaired assets by financial institutions weakened their financial intermediary functions, impairing their ability to provide sufficient funds for new areas