, such as financial institutions and institutional investors, became extremely cautious about counterparties'creditworthiness. that led to a sharp decline in transactions, not only in the interbank market where banks exchange funds but also in the cp and corporate bond markets where firms raise funds. as a result, the functioning of financial markets declined at a stroke, and the funds necessary for economic activity did not prevail. that, together with firms and households'intensified anxiety, shrank the global financial and economic activity in a panicky manner. the global economic conditions seem to have stopped worsening this spring. that is because the " acute pain " has started to dissipate for the following three reasons. first, ample fund supply by central banks and an aggressive injection of public funds into u. s. and european financial institutions have proved effective, and global financial markets have been regaining stability. second, inventory adjustments have progressed as a result of a substantial production cutback. and third, once plunged demand is now showing signs of gradual recovery, thanks to the effects of a large - scale economic stimulus around the globe. those developments are likely to continue for some time. if that is the case, what becomes more important from now is how to assess the effects of balance sheet adjustments centering on the united states and europe, which was the first factor behind the current economic downturn. however, that point is associated with high uncertainty. it takes a considerable period of time to complete the balance sheet adjustments following the experience of a large bubble. a possibility cannot be denied that the factors including the continued decline in the u. s. commercial real estate prices will make the adjustments more significant than envisaged in terms of duration and magnitude. meanwhile, emerging economies including china have recently been showing growth slightly stronger than expected. a large - scale economic stimulus in china has exerted favorable effects on the neighboring east asian countries, seemingly playing a role of raising economic growth of the regions as a whole. the bank will also pay attention to how the bold monetary easing in advanced countries affects emerging economies where the problem of balance sheet adjustments is relatively small. ii. the current state of and outlook for japan's economy based on the picture of the global economy, i will now move on to the current state of and outlook for japan's economy. from the autumn of last year, japan's economic conditions worsened far more sharply than those in the united states and europe where the current crisis had started. japan's real gdp

##s. however, japanese institutional investors ’ preference for jgbs is strong partly in response to the international financial regulations, and partly due to a lack of attractive domestic investment opportunities. therefore, as the bank continues to purchase large - scale assets, that effect on the interest rate formation has been more strongly pronounced especially after the expansion of the qqe. in fact, the yield curve has flattened further, with the yield in the medium - term zone falling into negative territory albeit temporarily, and the super - long end of the yield curve also declining considerably. meanwhile, an increase in the volatility of the interest rate has been observed recently. i have been monitoring carefully how that shape of the yield curve will influence a variety of asset prices and investors ’ asset allocation as a policy effect. on the other hand, i have been monitoring the side effects – such as the effects on financial system stability, including the broadly - defined settlement system, and the market functioning. also a smooth restoration of markets ’ price discovery function will be an issue from somewhat a longer perspective, in the process of seeking for an exit from qqe, as the bank purchases about 90 percent of the total amount of jgbs ’ market issuance on a gross basis. second, my understanding is that in the assessment of the achievement of the bank ’ s price stability target, what is important is not to focus on the specific price indicators, but to examine whether various economic entities such as firms and households change their bis central bankers ’ speeches behavioral patterns based on the assumption of a certain level of inflation with monitoring a wide range of indicators including those related to wages carefully. it seems that there is no silver bullet for estimating people ’ s medium - to long - term inflation expectations, and therefore whether or not they have started to heighten their expectations, which have consistently remained lower than those in the united states and the euro area, can only be judged qualitatively from various economic entities ’ behavioral patterns. in that regard, households have had an outstandingly sticky preference for extremely inexpensive goods and services under deflation. however, such preference is not so strong as that in the past, and firms ’ price - setting behavior has also been changing in a positive manner. more importantly, a basic wage - setting mechanism – base salaries are revised in line with price increases, which was almost forgotten under deflation – has started to revive in labor - management wage negotiations. it could lead to a breakthrough in changing people ’ s