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Opening Remarks
by Haruhiko Kuroda,Governor of the Bank of Japan

I. Introduction
Good morning, ladies and gentlemen. It is my great honor to say a few words at thebeginning of the 2013 BOJ-IMES Conference. On behalf of my colleagues at the Bankof Japan and myself, I would like to welcome all the participants from the academia,
central banks, and international organizations.
This year, we are going to tackle the issue of “Financial Crises and the Global
Financial System.” It is no doubt a very familiar theme for all of you. In fact, we havediscussed this topic time and again. Every time we faced an international financial
crisis—we had far too many of them—the international financial system had to evolvein response, and that called for new ideas, or at least, new twists on old ideas. This wasno easy task, as many of you, who were my colleagues in arms, would attest without any
hesitation. Working on the front lines of international finance in the recurring processof turbulence and evolution of the global financial system, under many diﬀerent hats,
I have always struggled with seemingly intractable problems, such as large fluctuationsin the exchange rate and huge swings in the flows of capital. In retrospect, past discussions and responses regarding the global financial system did not follow a straightline. We saw a series of trials and errors. Karl Popper, who was a philosopher of scientific methodology, mentioned that for the quest of the truth, “there is no more rational
procedure than the method of trial and error”.1 Through repeated trials and errors inevery past financial crisis, economics has actually accumulated new wisdom. As weface the formidable task of rebuilding the international financial system severely hit by
the most recent financial crisis, our trials and errors from the past will certainly provide
us with valuable insights.

II. The Role of the Trilemma of International Finance in the Evolutionof the Global Financial System
In light of wisdom that has been accumulated so far, the starting point of discussion on
the organization of a global financial system is the trilemma of international finance.
As you know, the trilemma shows that no economy can simultaneously achieve thethree goals of capital mobility, a fixed exchange rate, and independent monetary policy.
Global financial systems were adopted under the constraints of this trilemma. When an
adopted system became unsustainable, the result was a financial crisis, leading to the......................................................................................
1. Popper [1963].
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adoption of a new global financial system. This cycle was repeated many times over.
Let me briefly turn to a few historical examples.
At the end of World War II, the Bretton Woods system was introduced to solve
several problems that had occurred during the interwar period, including competitive
devaluations. With controls over capital mobility, this system allowed the simultaneous
pursuit of independent monetary policy and the peg to the U.S. dollar, which wasexchangeable with gold at a fixed rate. In the 1960s, against a background ofdeteriorating U.S. balance of payments, there were changes in the international financial
environment: the amount of U.S. dollars held by non-residents increased and theEurodollar market came into being and expanded. Under such circumstances, the U.S.
gold reserves continued to flow out and as the world became more uneasy with theconvertibility of the U.S. dollar, the Bretton Woods system was abandoned. Consequently, advanced economies maintained independent monetary policy, while adopting
the floating exchange rate system and further liberalizing capital mobility.
A few decades on, in the 1990s, currency crises hit a number of emerging economies,
such as Mexico, Thailand, Indonesia, South Korea, Russia, and Brazil. Against a background of increasingly liberal capital mobility and the accompanying growth of capital
account transactions, the principal driver of the crises was the unsustainable current
account deficits in many of those economies with de facto U.S. dollar-pegged exchange
rates. After the crises, the economies have pursued independent monetary policy andhave increased the flexibility of their exchange rates, while upholding capital mobility.
Moreover, taking into account the lessons of the currency crises, Asian emerging
countries have significantly increased their foreign exchange reserves and havepromoted regional financial cooperation, such as the Chiang Mai Initiative.
In sum, the evolution of the global financial system to date is heavily influenced by
the episodes of past financial crises, at the same time constrained by the trilemma ofinternational finance.

III. Issues for the Rebuilding of a Global Financial System after theRecent Global Financial Crisis
The recent financial crisis has had a great impact on the global financial system asmuch as or even more than past crises. In a world of deepening financial globalization,
financial crises were usually associated with emerging economies and triggered by a
sharp decline in the exchange rate. But this crisis was diﬀerent in two respects. First,
the epicenter of the recent crisis was in the advanced economies and the crisis spreadout from there to many emerging economies. Second, the crisis was triggered and thenamplified by the dysfunction of financial systems.
Reflecting on these observations, I believe that the global financial community
must, in its eﬀorts to rebuild the global financial system, come to terms with two issues:
capital controls and financial regulation and supervision.
On capital controls, in the past currency crises involving emerging economies, there
was some contagion between those economies. In contrast, in the recent financial crisis,
stress that arose in the United States and the euro area was transmitted at once to many

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Opening Remarks

emerging countries, including those in Central and Eastern Europe and Latin America.
One of the causes of such international transmission of the crisis is deemed to befinancial globalization and the accompanying global upsurge of gross capital flows,which has led to increasing attention over prudential capital controls. Moreover, inrecent years, the International Monetary Fund, which has long emphasized the benefitsof capital mobility, has, at least partially, accepted the necessity of capital controls as a
macroprudential policy tool.
Turning to the regulation and supervision of financial institutions for the purposeof maintaining the stability of the financial system, in the wake of the recent financial
crisis, there is a globally renewed recognition of the importance of financial stability.
Against that background, international meetings, like those of the G20, have discussed
how financial regulation and supervision could be enhanced and harmonized internationally. Meanwhile, in the euro area, the discussion on a banking union is underway.
In this context, the concept of “financial trilemma,” which has recently been proposedin the academia, seems to oﬀer a useful viewpoint.2 In the argument of financial
trilemma, it is held that any economy cannot simultaneously achieve three goals offinancial integration (capital mobility), financial stability, and national financial policy.

IV. Conclusion
Finding solutions to these two issues and building a new global financial system under
the trilemma of international finance are no easy tasks. Even if we could establish a
global financial system that is robust at this time, such a system is unlikely to lastforever, given that a financial crisis beyond our imaginations may occur in the future.
Having said this, it is by no means futile for us to examine the relevant issues andpursue a more robust global financial system. As history has shown, there were morethan a few financial crises, and on each occasion, there were discussions on building
a new financial system. The accumulation of wisdom in the process has been helpful forshaping the policy responses to subsequent crises and rebuilding of the financial system.
Today, the global economy has not yet completely shaken oﬀ the eﬀects of the
global financial crisis, even after five years since the onset of the crisis. Nevertheless,I am convinced that the great challenges posed by the crisis will give us new insights
and help us create a new and better world. I hope that with all the distinguished participants from around the world exchanging their experiences and views, this conference
will contribute to the accumulation of wisdom that is urgently needed for the current
eﬀorts to rebuild the global financial system and sure to be useful in the future when
black swan events strike again. Thank you.

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2. Schoenmaker [2011].

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References

Popper, K., “Science: Conjectures and Refutations,” Conjectures and Refutations, London: Routledgeand Kegan Paul, 1963.
Schoenmaker, D., “Financial Trilemma,” Economics Letters, 111 (1), 2011, pp. 57–59.

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