the first oil crisis, crude oil prices surged from 3 u. s. dollars to 12 dollars per barrel – a fourfold rise – and during the second oil crisis they surged from 15 dollars to 40 dollars – an increase of two and a half times. in the current phase, if we start from 2002, when the level of oil prices was 21 dollars, the present level of 110 - 120 dollars – somewhat below the recent peak – is more than five times the level recorded in 2002. as a result, the size of the income outflow resulting from the surge in oil prices has also been the largest during the current phase : about 5 percent of real gdp, compared with about 3 percent during the two oil crises. the effects of rises in crude oil prices, such as the resultant outflows of income and decreases in production capacity, cannot be offset unless export prices are raised to the same extent as import prices. nevertheless, there seem to be many aspects where the situation can be improved through our own efforts. in fact, economic and price developments differed markedly between the periods immediately after the two oil crises emerged. during the first oil crisis, japan's economy suffered from a combination of runaway inflation and economic stagnation – in other words, stagflation. the economy suddenly contracted, and cpi inflation peaked at an annual rate of 25 percent. contrarily, during the second oil crisis, the economy continued to grow at a rate of 3 - 5 percent and the cpi posted only a single - digit increase. of the various factors behind the difference in japan's economic and price performance between the two oil crises, two seem to be most important. the first factor was the difference in the economic and price situation immediately before the crises as well as the policy response. already prior to the first oil crisis, the economy was overheated and the financial environment was overly accommodative, having increased the inflation expectations of households and firms. against this background crude oil prices surged, making matters even worse. on the other hand, when the second oil crisis occurred, the economy was not overheated, the financial environment was not overly accommodative, and monetary tightening was initiated in a timely manner. this kept inflation expectations low and thus succeeded in avoiding the second - round effects – a rise in prices of non - petroleum goods and services triggered by a rise in crude oil prices. the second factor was that japan succeeded in transforming its economic structure while accepting the change in

and materials prices. ii. disruptions in global financial markets and the slowdown in the global economy first, i will address a topic related to the disruptions in global financial markets and the slowdown in the global economy. roughly one year has passed since the u. s. subprime mortgage problem emerged, underlying the disruptions in global financial markets, and the nature of this problem seems to have evolved over time. the first stage was the time of " liquidity constraints, " when conduits and aggregators of securitized products and financial institutions faced difficulties in raising funds. then the second stage emerged : the time of " credit contraction. " in this stage, financial institutions have tightened their credit standards and their lending attitudes, and this has started to exert strong downward pressure on the economy. most recently, a third stage has emerged. in this stage, delinquency rates of not only subprime - related products but also commercial real estate loans and consumer loans have been rising reflecting the sluggishness in the u. s. economy. as a result, a situation in which the sluggishness in the economy causes financial institutions'asset quality to deteriorate further – with further adverse impact on the economy – is becoming a focus of concern. to put it another way, at the third stage there are concerns about a negative feedback loop between financial markets, asset prices, and economic activity. u. s. economic growth is likely to remain sluggish for some time, since it is unforeseeable at present when and how the negative feedback loop will diminish. in europe, economic growth is slowing further. in asia, although the chinese and indian economies continue to post high growth, some of the nies and asean economies are showing deceleration in exports and signs of slowing domestic demand. the growth rate in the world economy taken as a whole will inevitably slow, although it remains at a high level when compared with the average for the past three decades. iii. the surge in energy and materials prices and japan's economy next, i will address a topic related to the surge in energy and materials prices. since japan depends heavily on imports of resources, a rise in such prices exerts downward pressure on japan's economy through an outflow of income and exerts upward pressure on prices. the rise in crude oil prices during the current phase has been the largest, even compared with the two oil crises. during