In the case of Japan, since deflation persisted for a prolonged period, one might take the view that, for the time being,a higher priority should be placed on price stability than financial system stability.
Second, as I mentioned, in order to stabilize the financial system, the injection of capital into the banking system together with the provision of liquidity is indispensable.
Financial system stability and international legal issues Lastly I will take up as the legal point atissue the role that law is playing in financial system stability, especially in an international aspect.
In the Bank of Japan Act, contributing to the maintenance of stability of the financial system is stipulated as the Bank of Japan's purpose, along with achieving price stability..
Now that an adverse feedback loop between financial and economic activity is rearing its head in Japan,it is vital that all possible measures are taken to ensure the stability of the financial system.
I would not reject that way of thinking, but I am personally uncomfortable with accepting the dichotomy between monetary policy for price stability andmacroprudential policy for financial system stability.
Furthermore, extra-territorial application of domestic rules, in spite of its good intentions,could have unintended negative consequences for the stability of financial systemsof other countries.
This process can promote a market participant's entry into or withdrawal from the financial markets, and may thus push up the overall quality of participants,thus enhancing the stability of the financial system.
As is the case here in the United Kingdom, having experienced the recent financial crisis,a central bank's involvement in ensuring the stability of the financial system has strengthened globally.
Approaches Taking Account of Macroprudence With the importance of macroprudence having been recognized, what sort of approaches should central banks and regulatory andsupervisory authorities take to protect the stability of the financial system?
The Bank is responsible for maintaining both price stability and the financial system stability. Therefore, when a conflict is expected in performing these two mandates, it is necessary to consider the respective pros and cons of the two mandates and pursue a finely-balanced policy measure.
In order to prevent a continuous price decline and establish a basis for the stable and sustainable growth of Japan's economy, the Bank of Japan is determined to continue its utmost efforts as a central bank,including those to ensure financial system stability.
Long-term interest rates surged temporarilyfollowing the release of the Bank's statement,"New Initiative toward Financial System Stability," on September 18, 2002 and the government auction of ten-year Japanese government bonds(JGBs) on September 20, 2002, where total bids fell short of the amount the Government offered.
While it seems fair to say that Japan's financial system has remained relatively stable compared with those of the United States and Europe during the recent crisis, the Bank will, in cooperation with the FSA,continue to strive to ensure the stability of the financial system.
Role of financial authorities Strengthening of the risk management of financial institutions and improvement of the financial infrastructure are likely to induce further disclosure. This in turn will promote efficient functioning of the market check mechanism,and thereby contribute to the stability of the financial system.
The Bank of Japan Act stipulates that the purpose of the Bank is to carry out currency andmonetary control as well as to contribute to the maintenance of the stability of the financial system, and therefore the Bank is responsible for taking care of both tasks equally Chart 6.
In Japan, the Financial Services Agency(FSA)-- which is legally authorized to conduct industry-wide supervision and inspections-- and the Bank--which contributes to financial system stability, such as through the"lender of last resort" function-- are making joint efforts in carrying out macroprudential policy, fulfilling their respective functions.
The Bank released the"New Initiative toward Financial System Stability" on September 18, 2002 and announced that it would consider the possibility of purchasing stocks held by banks. The Government expected that the Bank's stock purchasing plan would enhance the effectiveness of the current monetary easing measures through a recovery of the financial intermediary function, as well as advance structural reforms of the economy through unwinding of cross-shareholdings.
However, looking back,the most important benefit of quantitative easing was its contribution tofinancial market and financial system stability through the provision of abundant liquidity1.
Following this principle, central banks made every effort to stabilizefinancial markets and the financial system, thereby averting a repeat of the Great Depression of the 1930s.
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