size of and the global spreading of the accumulated excesses both in financial and economic activity. second is an extreme decline in the functioning of financial systems worldwide since the emergence of the financial crisis triggered by the failure of lehman brothers last september. due to the failure of lehman brothers, provider of funds, such as financial institutions and institutional investors, became extremely cautious to take counterparties'credit risks. this led to a sharp decline in the volume of transactions, not only in the interbank market where financial institutions exchange funds, but also in markets for housing loans and other securitized products, and in the cp and corporate bond markets where firms raise funds, leading to a situation of a de facto dysfunction of financial markets. in addition, banks, faced with withdrawal of deposits and concerns over their financial positions in addition to the impairment of their capital bases, suddenly tightened their lending attitudes. if the functioning of the financial system declines substantially, in terms of its function to intermediate funds in the financial markets and of extending credit by financial institutions, it is inevitable that economic activity will be adversely affected. furthermore, the deterioration in economic activity further worsened the business conditions of financial institutions by turning housing and corporate loans into impaired assets, and this in turn further aggravated economic activity – an emergence of a negative chain reaction. this is the mechanism of the so - called adverse feedback loop between financial and economic activity, which has been used to describe the deterioration in global economic conditions from last autumn. moreover, a chain reaction of the financial crisis spread across the border to various countries and regions. the spreading of the u. s. and western european financial crises to emerging and commodity - exporting economies, such as central and eastern europe and latin america, was a background factor which further increased the severity of the global economic downturn. financial institutions in emerging and commodity - exporting economies had not invested much in securitized products backed by subprime mortgages, which became the direct cause of the current financial crisis, and, in this sense, the amount of losses they incurred was limited. therefore, at the beginning of the financial crisis, there were views that the effects of the crisis on emerging and commodity - exporting economies would be limited. however, u. s. and western european financial institutions and investors had been also assuming an important role in intermediating funds to these economies. therefore, the rapid decrease in loans extended to emerging and commodity - exporting economies by u. s. and western european financial institutions led

) for all items excluding fresh food rose to 2. 4 percent last summer due mainly to the rise in crude oil prices, but declined thereafter to around 0 percent reflecting the decline in prices of petroleum products and the stabilization of food prices. looking ahead, the year - on - year rate of decline in the cpi ( excluding fresh food ) will likely accelerate through the middle of this fiscal year reflecting the deterioration in demand conditions in addition to the fact that the level of cpi at this time last year was elevated due mainly to the rise in prices of petroleum products and food. thereafter, however, assuming that medium - to long - term inflation expectations remain stable, the rate of decline in the cpi ( excluding fresh food ) is likely to moderate as the effects of the changes in the prices of petroleum products abate. the above projections regarding future economic activity and prices continue to be attended by considerable uncertainties. those that demand attention are the downside risks. the bank will continue to carefully monitor developments in economic activity and prices bearing in mind these downside risks. iii. financial conditions developments in the world economy and in global financial markets are the major downside risks to japan's economy, but i have already elaborated on them and i will now turn to japan's financial conditions. from last autumn, the effects of the financial crises in the united states and europe spread to financial markets in japan. in the money market, tensions increased as can be observed in wider spreads between interbank funding rates and short - term government security rates. the issuing conditions for cp and corporate bonds sharply deteriorated. the initial cause of the recent tightening in financial conditions was the global credit contraction. therefore, the recent changes in financial conditions are characterized by the sharper deterioration in financial positions of large firms than in those of small firms. the heightened pressures in the global financial and capital markets directly affected the financial positions of large firms through increased difficulty in raising funds from foreign banks and from the domestic cp and corporate bond markets. large firms increased the volume of borrowing from banks and tried to hold ample liquidity at hand due to increased concerns over future financial conditions. the deterioration in financial positions of large firms negatively influenced the financial positions of small firms through various channels. in view of these assessments, the bank took aggressive policy actions in order to provide abundant liquidity in the money market and to facilitate corporate financing. these actions include the outright purchases of cp and corporate bonds. although cp and corporate bonds are fund - raising tools used mainly by large firms