financial markets were affected to a certain degree by the fact that market liquidity declined because risk taking by major market makers was constrained by the full - fledged enforcement of the so - called volcker rule since july, and consequently the presence of technical players – that is, players engaging in algorithmic trading and high frequency trading ( hft ) – grew amid the thin summertime trading volume. i feel it is necessary to carefully bis central bankers ’ speeches monitor whether or not something trivial could lead to market instability not only in summer but also at other times, such as the end of the year or quarter, when liquidity tends to decline due to various constraints imposed by regulation ( chart 4 ). second, there is a possibility that the u. s. dollar funding cost will hover at a high level due to structural factors. the cost of converting yen into u. s. dollars in the swap market has been increasing and the basis swap spread has widened, as expectations for the interest rate hike in the united states have mounted, in addition to the usual end - of - year strengthening of demand for u. s. dollar funds ( chart 5 ). while i assume that japanese banks already have been making efforts to enhance their stable foreign - currency funding base while expanding their overseas business, i feel that it is necessary to carefully monitor this situation. the bank, in cooperation with the federal reserve, has a backstop in place in the form of the u. s. dollar funds - supplying operations, but i would like to reemphasize the importance of financial institutions ’ efforts to secure their own stable funding base. the third point is the impact of additional monetary easing by the ecb on the global financial markets. in europe, the presence of negative interest rates already has become prevalent in some countries in relation to the currency policy, even before the deposit rate reduction by the ecb to a negative rate. the ecb ’ s recent deposit rate reduction is expected to escalate this situation. the yield curve in germany, used as a benchmark, had temporarily turned negative with respect to bonds with maturities of six or seven years. i am keeping a close watch on how such an interest rate formation, coupled with the interest rate hike in the united states, will affect the flow of funds in the global financial markets, and whether or not the flattening of the yield curve will undermine the sustainability of government bond purchasing by the ecb from the perspective of the sustainability of the bank ’

. recently, the international monetary fund ( imf ) has also been fairly consistently revising downward its forecast of global growth in its world economic outlook ( chart 1 ). although the chinese economy has been slowing somewhat, mainly in the manufacturing sector, its services sector has been firm ( chart 2 ). under the authorities ’ strong commitment to supporting growth, the economy is expected to broadly follow a stable growth path, albeit with the growth rate continuing to slow somewhat, as the authorities proactively carry out policy measures to support economic activity from both the fiscal and financial sides ( chart 3 ). however, there are signs of deflationary pressure from asset price adjustments, as shown in the gdp deflator turning negative again in the gdp statistics for the july - september quarter, and this warrants attention. the key to realizing stable growth will be whether the economy can shift from being investment - and export - driven to being domestic demand - driven, accompanied by structural reforms. bis central bankers ’ speeches i see downside risks to the outlook that i have just described, and note the following three points. first, the growth of the world economy is disproportionately led and driven by that of the united states. the expansionary phase of the u. s. economy already has lasted for around seven years since the global financial crisis, representing the fourth longest period of expansion in the postwar era, and from the perspective of the economic cycle, it can be said that the expansionary phase is maturing. of course, under pressure from balance sheet adjustments, the pace of recovery after the global financial crisis has been moderate compared with that in past recovery phases, so making a simplistic comparison in terms of the duration of expansion may be problematic. however, if wage growth – which so far has been lagging – gains momentum while the slack in the labor market diminishes gradually, it seems it will be necessary to keep in mind the risk that the economy may enter an adjustment phase due to the narrowing of the margin for firms. under these circumstances, the federal reserve intends to normalize the monetary policy at a moderate pace. i would like to watch how the normalization of interest rates plays out in relation to the duration of the expansionary phase. second, in europe, there remain various adjustment pressures ; in addition, the refugee problem is emerging as a serious challenge. for example, an agreement of sorts was reached among relevant countries on the greek debt problem around the middle of the