of japan's economy and the outlook for its future, taking into account the developments in global financial markets and the world economy that i have just described. japan's economy continued to enjoy a moderate but prolonged economic expansion from the beginning of 2002, but since the middle of 2007 the economy has been hit by a series of negative shocks, and become increasingly sluggish. economic growth began to slow from around the end of 2007, due mainly to a sharp decline in housing investment as the revised building standard law came into force. growth in corporate profits and wages has been subdued due to the deterioration in the terms of trade since this spring reflecting increases in energy and materials prices, and as a result growth in business fixed investment and private consumption has been slowing at a moderate pace. the slowdown in overseas economies has become pronounced as strains in global financial markets and in the u. s. and european financial systems have intensified since this summer, and reflecting this, growth in japan's exports turned negative. and since september, tightening in corporate financing, which i will discuss later, has started to negatively influence economic activity. with these negative effects accumulating, economic conditions have recently been deteriorating. the results of the december tankan ( short - term economic survey of enterprises in japan ) released last week also indicated the severe situation of japan's economy. looking ahead, we judge that economic conditions are likely to increase in severity for the immediate future. this is because domestic private demand is likely to weaken further as corporate profits decline, firms'funding conditions deteriorate, and the employment and income conditions in the household sector worsen, and also because exports are expected to decrease sharply due to the further slowdown in overseas economies and the appreciation of the yen. as for prices, the year - on - year rate of change in the consumer price index ( cpi ) for all items excluding fresh food had been around 0 percent from around 2003, but from around the end of 2007 it rose at a rapid pace, especially in petroleum products and food, due to the surge in commodity prices, and reached 2. 4 percent this summer. thereafter, it began to decline reflecting the drop in commodity prices. looking ahead, given that aggregate supply and demand conditions will likely ease as growth in real gdp is expected to fall short of the potential growth rate for the next several quarters, and that commodity prices have been falling, the rate of change is expected to moderate further. in sum, economic conditions have been deteriorating and are

the gses. moreover, the gse regulator should be able to adjust capital requirements quickly and as needed to address developing or foreseeable concerns, rather than being required by cumbersome procedures to wait until after the damage has been done. a strong capital base would significantly reduce the implicit subsidy and incentive problems that now distort gse investment decisions ( lucas and mcdonald, 2006 ), while also increasing their safety and soundness. the establishment of a clear and credible gse receivership process, the second element, is needed to create market discipline for these companies. reform legislation should establish ( 1 ) a well - defined and mandatory process for placing a gse in receivership and ( 2 ) a method for resolving a gse once it is placed in receivership. both parts are necessary for the receivership process to be meaningful and credible. market participants should clearly understand that, once certain conditions arise, regulatory forbearance will be impermissible and a gse receivership will be established. importantly, the gse receivership process should include a mechanism for ensuring that both the shareholders and legal provisions such as prompt corrective action and the least - cost - resolution requirement probably contribute to the perception of bank debt holders that their investments are not guaranteed if the bank gets into financial trouble. recently, the federal deposit insurance corporation ( fdic ) has proposed to require that large banks maintain depositor records in a common format to help ensure that those creditors do not escape losses in the event of a bank failure. also, the ability of bank holding companies to increase their government - backed funding is limited. by law, banks cannot make additional banking acquisitions if the resulting firm would control more than 10 percent of u. s. insured deposits. this comparison excludes the temporary 30 percent additional capital currently required by ofheo because of the operational risks posed by the gses ’ recent accounting problems. interest rate risk depends on the degree of hedging, which is at the discretion of firm management. however, because the gses ’ portfolios are concentrated in the mortgage - backed securities market and thus are subject to rapid changes in market value, the risk profile of the gses can change rapidly in response to unexpected movements in interest rates. in contrast, banks hold a more diversified mix of liabilities and assets, many of which are less sensitive to unexpected changes in interest rates, suggesting that banks as a general matter are less prone to interest rate risk. regardless, little social benefit is