of loans and it was more difficult to gauge the decline in their value. it should, however, be noted that currently in the united states, commercial real estate prices continue to fall and the quality of consumer loans continues to deteriorate, and therefore the sequence in which the problems related to impaired assets arise is different in the united states from that in japan. meanwhile, in terms of financial market stability, which is key to avoiding a sharp economic contraction, the degree of instability seems to have been relatively smaller in japan reflecting partly the bank of japan's active stance as the lender of last resort. the balance - sheet adjustment process and the effectiveness of monetary policy the second aspect with regard to the policy response concerns the effectiveness of monetary policy. as japan's experience shows, the effectiveness of accommodative monetary policy through policy rate reductions declines substantially in an economy that is undergoing balance - sheet adjustments. this, of course, does not mean that monetary easing is ineffective. monetary easing encourages spending and risk - taking activity by entities that are not suffering from excessive debt and supports aggregate spending and income. monetary easing also enhances debt reduction through a decline in interest payments and accelerates balance - sheet repairs by supporting asset prices. one of the distinct differences between japan and the united states in terms of the conduct of monetary policy amid balance - sheet adjustments concerns the income transfer effects between economic entities. needless to say, in the economy as a whole, for economic entities with excess debt there will correspondingly be entities with excess savings. in japan, as a result of the reduction in the policy rate, there was a large income transfer from the household sector, which held large amounts of assets, to the heavily indebted corporate sector. however, in terms of income distribution, i believe that in the final analysis, the policy rate reductions supported household sector income : although they lowered households'interest income, thereby restraining consumption to some extent, the policy rate reductions facilitated the adjustment process in the corporate sector and supported economic activity overall, thereby propping up household sector income from employment and hence the economy. meanwhile, since the united states, unlike japan, is a net debtor country, the reduction in policy interest rates will reduce interest payments to creditors overseas, resulting in an income transfer from overseas sectors to the united states. in other words, in terms of balance - sheet adjustments, the united states has the advantage that policy interest rate reductions bring about income transfers that are favorable to the country. however

of the credit bubble in the united states and europe, remains unresolved. this means that households and firms will have to restrain consumption and investment in order to reduce the debts accumulated when asset prices were rising. while such debt reduction, in other words, deleveraging, is a rational response from the perspective of individual households and firms, if they restrain spending simultaneously in large numbers, this could cause a decline in aggregate demand and a fall in income and profits, which provide the necessary resources for deleveraging. financial institutions, too, will inevitably have to reduce assets and risks, which had grown excessively relative to their capital bases. while balance - sheet adjustments are indispensable for the economy to return to a sustainable growth path, they will continue to exert chronic downward pressure on the economy during the adjustment process, as japan's experience shows. meanwhile, emerging and commodity - exporting economies essentially face few balance - sheet problems of their own and have been recovering at a faster rate than anticipated in early spring. given these considerations, a key issue in determining the outlook for the global economy is how to assess the pressures from these balance - sheet adjustments in u. s. and european economies. comparing japan's experience of balance - sheet adjustments in the 1990s and the current situation in the united states may provide some important pointers in this context. ii. balance - sheet adjustments and policy responses the size of balance - sheet adjustments let me begin by comparing the size of balance - sheet adjustments necessary in japan and the united states. taking as an example real estate prices in real terms – using the consumer price index as deflator – the pace of decline in both residential and commercial real estate prices from their peak levels has been more or less the same in the united states and japan, although thus far it seems to have been slightly faster in the united states. next, how do the two square up in a more direct comparison of the degree of excessive leverage? one way to gauge excessive leverage is to look at the upward divergence of the debt - togdp ratio for the non - financial private sector from the trend of the past 20 year. based on this somewhat mechanical approach, we find that the level of excessive leverage is also about the same for japan and the united states. sectors that require balance - sheet adjustments another difference between japan and the united states is the sectors requiring balancesheet adjustments. in the case of japan, it was the corporate sector that mainly faced excessive debt