miyako suda : the current situation of and outlook for japan ’ s economy and the conduct of monetary policy summary of a speech by ms miyako suda, member of the policy board of the bank of japan, at a meeting with business leaders, wakayama, 3 june 2010. * * * i. japan ’ s economy and prices and the conduct of monetary policy a. developments in financial markets 1. developments in global financial markets and the situation in greece the topic i would like to discuss today is the current situation of, and outlook for, japan ’ s economy and the bank of japan ’ s conduct of monetary policy. let me begin by looking at developments in global financial markets. following the unprecedented turmoil triggered by the failure of lehman brothers in september 2008, global financial markets regained stability from around the spring of 2009 due to various measures taken by governments and central banks around the world. the libor – ois spread, an indicator of counterparty credit risk, has narrowed to levels significantly below those seen before the lehman shock. recently, however, signs of instability have reemerged due to concerns over fiscal problems in some european countries, particularly greece, and uncertainty regarding financial regulation in the united states and europe. the crisis in greece has caused large fluctuations in stock prices and foreign exchange rates around the world, increasing investors ’ risk aversion and deepening the fiscal woes of other european countries. in what follows, i would like to review recent developments in global financial markets, focusing in particular on the situation surrounding greece. the greek debt crisis was triggered by a loss of confidence in greece ’ s official statistics and its ability to repay its debt. in october 2009, the new administration in greece announced that the country ’ s budget deficit in 2009 would be far greater than previously estimated. the significant revision gave rise to concerns about the reliability of greece ’ s official statistics and fiscal discipline, prompting a large rise in greece ’ s sovereign risk premium. in january this year, the greek government submitted to the european commission a three - year plan to cut its budget deficit, and in april, the 16 euro area member states agreed on a 30 - billion euro financial support package. at that stage, greece was still able to procure funds relatively smoothly through the issuance of government securities. however, greece ’ s sovereign risk premium increased rapidly from the end of april to early may, following a further revision to its budget deficit estimate, a sharp downgrading of greek government

as for the price situation in overseas economies, a disinflationary trend in the united states and europe continues. specifically, in the united states, the year - on - year rate of increase in the consumer price index ( cpi ) for all items less energy and food, or the core cpi, has continued to slow, registering 0. 9 percent in april, the smallest increase since january 1966. in the euro area, the year - on - year rate of increase in the core cpi declined to 0. 8 percent in april, the lowest since the introduction of the index. these developments in the united states and europe imply that the deterioration in the aggregate demand and supply balance in these economies has been exerting downward pressure on prices. on the other hand, inflationary concerns are intensifying in emerging economies. in china, in particular, real estate prices in 70 major cities in april marked the largest year - on - year increase on record and the year - on - year increase in the cpi in april was the highest in a year and a half. turning to domestic demand in japan, public investment has been decreasing since the second half of fiscal 2009. on the other hand, corporate profits have been following a recovery trend due mainly to increased production and labor cost restraint. reflecting these developments, business fixed investment has leveled out and started to show signs of picking up, as evidenced by the continued increase in shipments of capital goods, a coincident indicator of business fixed investment. the employment and income situation remains severe, but gradually signs of a recovery are emerging : the unemployment rate has peaked out, and nominal wages per employee increased by 1. 5 percent in april year on year, registering a positive figure for the second consecutive month. against this background, private consumption, notably of durable goods, has picked up due to the effects of policy measures such as tax reductions on purchases of environmentally friendly cars and the introduction of the eco - point system, which favors energy - efficient products. it should be noted, however, that the substantial increase in sales of electrical appliances through march was due to a rush of demand prior to tighter application of the eco - point system for flat panel televisions, and that sales at department stores, which marked a quarter - on - quarter increase in the first quarter of 2010 for the first time since the fourth quarter of 2007, have been sluggish since the beginning of april, largely due to weak sales of apparel reflecting unfavorable weather conditions. although some market