Two, be more tolerant of inflation outcomes close to zero. Masaaki Shirakawa draws on Japan’s experience to suggest that the risks to economic activity associated with very low inflation did not warrant ultra loose monetary policy stances that undermine financial stability. [14] However, a more flexible approach to implementing inflation targeting can potentially be misinterpreted as reducing the commitment to price stability. It therefore needs to be accompanied by clear communication on the consistency between taking financial stability into account while pursuing price stability as the primary objective. FISCAL POLICY Fourth and final proposition: fiscal policy plays an important role in helping to secure both price stability and financial stability. The best contribution that fiscal policy can make to both price stability and financial stability is to ensure the sustainability of public debt. The role of fiscal policy in an integrated policy framework has not received as much attention as it probably deserves. Let me offer two reasons why it should. Sound public finances reduce the risk of fiscal dominance, enabling monetary policy to operate more freely to pursue its price stability mandate. Quantitative easing by major central banks through the purchase of massive amounts of government debt was a necessary response to the strong deflationary pressures unleashed by the Global Financial Crisis. But as government spending continued to grow long after the crisis and central banks continued to purchase government debt, the risk of fiscal dominance grew: the concern that normalising, let alone tightening, monetary policy would create fiscal problems.

With modern production processes broken down to components and parts that could be regrouped at the final assembly, East Asians have availed themselves of this phenomenon by capitalizing on the “benefits” from the international division of labour and production in the areas where they have the greatest comparative advantage. This has in turn brought about the lowest and most efficient production processes available on an international scale, while at the same time encouraging specialization and boosting productivity growth in individual economies. This “internationalization” of the production process has now been replicated many times over. Countries move up the product ladder towards more sophisticated manufactured products, and parts of the production process are then relocated from traditional producers such as from Japan, Korea, and Taiwan to South East Asian countries with lower production costs. This has led not only to a rise in the value of trade in the region, but also in a shift of the structure of trade and inter-linkages in production in the region. Against this background, the success of any enterprise in the region, going forward, must involve production networks and supply chains based not only on one single national economy, but also across borders. This can be witnessed today in the case of manufactured goods, such as automobile production, electronics or textile and garments. In each case, raw materials are being sourced in one country, whilst assembly production or designs of that same product could be made in another country - all based on the location where they best have comparative advantage.