the euro area is currently somewhat higher than expected as a result of the higher oil prices. the ecb warned that if the increase in oil prices is sustained, it would also have an impact on inflation rates during the rest of 2002. in the united kingdom, for 2001 as a whole, real gdp growth averaged 2, 2 per cent, the highest among the g - 7 countries. the united kingdom could, however, not avoid the global slowdown, which caused quarter - on - quarter growth in 2001 to decelerate registering zero growth in the fourth quarter of 2001. the economy, however, managed to recover marginally in the first quarter of 2002 with preliminary estimates showing that gdp increased by a seasonally adjusted and annualised rate of 0, 3 per cent. given the united kingdom's significant exposure to economic and financial developments in the united states, improvements in the us economy are expected to positively impact on economic prospects in the united kingdom. this will support continuing growth in domestic demand resulting from the more expansionary monetary policy since the beginning of 2001 and a fiscal stimulus, largely in the form of planned rises in general government spending. growth for 2002 is expected to average 2 per cent. 5. japan japan continues to experience recession – the most severe of the past decade. however, the increasing economic activity in the united states and asian economies has led to an increase in japanese exports. this increase in exports, which accounts for about 10 per cent of the economy, recently prompted the bank of japan to raise its assessment of the economy for the second straight month – the first back - to - back upgrade in 19 months. the japanese central bank stated in its april monthly report that the japanese economy still continues to deteriorate as a whole, but concluded that the pace has moderated somewhat. 6. emerging economies recent economic attention on latin america has focused on the crisis in argentina and its implications for the rest of the region. argentina's financial markets came under increasing pressure in 2001 because of the growing fear of a debt default and the end of the peso's peg to the dollar. a 66 per cent decline in the peso since the government abandoned a decade - old peg to the dollar in early january has triggered steep price increases. in march, inflation was 4 per cent ( month - on - month ), the highest in 11 years. despite months of talks on an imf sponsored recovery package, both the argentinean government and the imf remain divided on a number of issues

s financial system, there was relatively a large decline in the functioning of cp and corporate bond markets. on the other hand, the direct impact on financial institutions central to japan ’ s financial intermediation remained relatively small, compared with that on u. s. and european financial institutions, and the stability of the financial system as a whole was maintained. three reasons can be pointed out. first, and probably the major reason, was that japanese financial institutions had been generally cautious about taking risks based on the experience of the financial crisis since the 1990s. specifically, their investments in complex financial products such as collateralized debt obligation had been low and they had not adopted, unlike major u. s. and european financial institutions, the originate - to - distribute business model in a full - fledged manner. second, in terms of incentive, there was relatively low pressure from shareholders who pursued short - term returns and the remuneration system of financial institutions ’ managers was also not conducive to short - term risk - taking activity. third, as a result of the efforts by the public authorities to enhance the robustness of the financial system, including an establishment of a resolution framework for financial institutions, concern about the surfacing of systemic risk did not heighten among depositors and market participants. nevertheless, the global financial crisis has also affected japan ’ s economy in various forms such as a deterioration in economic activity, a fall in stock prices, and a decline in market functioning. japanese financial institutions have also been hit accordingly in the form of impairment due to a decline in stock prices and of an increase in credit costs. in the meantime, the challenges japanese financial institutions have been faced with, such as the weakness of core profitability and vulnerability against stock price fluctuations, have been highlighted again. i will come back to the details later. ii. prospects for japan ’ s financial system a. changing environment surrounding japan ’ s financial system the topic of today ’ s panel discussion is “ whither the financial system? ” it is quite a difficult question, but in the hope of providing some reference to the discussion, i offer some consideration of how japan ’ s financial system should be after the financial crisis both from macro and micro perspectives. as it might be useful to consider first what changes are expected in the environment surrounding japan ’ s financial system in the future, let me start with the following three points. strengthening of global regulation and supervision first, financial regulation and supervision will be strengthened on a global basis. on