monetary policy as well. third, in using macro - prudential measures we should be aware of their long - run consequence of distortion in resource allocation. however, in practice, i have strong reservations over the effectiveness of some macroprudential measures in a malign bubble. take the loan to value ( ltv ) ratio as an example. in the heyday of a ballooning bubble, the denominator of the ltv, i. e., the market value of property, goes up higher and higher. thus, the ltv that seemed sufficient to cap the loan volume becomes grossly insufficient in a few months or even weeks. the same is true for quantitative constraints on loans, since instruments bypassing the constraints emerge, as exemplified in the experience of the japanese property bubble of the 90s. 6 moreover, macroprudential measures are sometime used to halt the advance of a bubble only temporarily, which eventually comes to the surface again later with greater force than before. so an apparent success in the present may be an omen of failure in the future. there is another issue which has been unfortunately overlooked in the discussion of dealing with a bubble, but is potentially most problematic of all : communication with the public. how can policy makers convince the public that we are facing a ballooning malign bubble when there is no apparently imminent threat to the system? it is extremely difficult to persuade people who ( want to ) believe “ this time is different ” and are convinced they are now on the foothills of eternal prosperity, just as long as their path is not blocked by some stupid policy maker. in retrospect, i have to point out sadly that the public sector is often partly responsible for nourishing such overly optimistic expectations in the public. 7 although i have expressed some reservations so far about the emerging policy consensus in the early or prevention stage of a malign bubble, these problems are almost trifling in from this perspective, both the malign property bubbles of japan and the united states, and the european sovereign crisis have a similar origin : overly optimistic expectations of the future in the population dividend phase. for more detailed discussion on macro - prudential policies in the case of the japanese property bubble, see nishimura, kiyohiko g. ( 2011 ) “ macroprudential lessons from the financial crisis : a practitioner ’ s view, ” in : kawai, masahiro. and eswar prsard ( eds. ) asian perspectives on

, i have described the bank's thinking regarding the conduct of monetary policy in terms of interest rate policy. now, let me remind you of an important fact : proper functioning of financial markets is a prerequisite for monetary policy to be effective. it is therefore vital to ensure the stability of japanese financial markets when global financial markets remain volatile. fortunately, japanese financial markets have so far been stable unlike their u. s. and european counterparts. mainly this is because japanese financial institutions have had only limited exposure to subprime - related products, but i believe that a considerable role was also played by the fact that the bank, based on its past experience of financial crises, had already established a framework for flexibly providing liquidity. as you know, since last summer central banks in north america and europe have introduced various tools for liquidity provision to address elevated pressures in short - term funding markets. for example, the fed has extended the maximum maturity of its funds - supplying operations to one month, from two weeks. the bank employs funds - supplying tools with a variety of maturities – some of which have a maximum maturity of one year – and this enables the bank to provide funds with the appropriate maturity. in march this year, the fed introduced a credit facility that allows securities companies to borrow funds. the bank has included securities companies as counterparties since 2001, when it introduced a complementary lending facility. as for collateral, central banks in north america and europe have recently expanded the range of eligible collateral they accept, while the bank has long accepted a broad range of assets as eligible collateral. moreover, the bank has a " pooled collateral " system, which allows counterparties to change their collateral in a flexible manner when necessary. needless to say, excessive use of such supportive measures may hamper the proper functioning of financial markets, which should operate autonomously, and therefore it is important to maintain a good balance between offering supportive measures and leaving things to the autonomous functioning of the market. what we have learned from japan's experience in 1997 and subsequent years, however, is that once strains occur in borrowing from the market, smooth borrowing and lending become difficult, and problems cannot be easily resolved. in order to maintain a financial environment in which monetary policy accommodation effects derived from the present low interest rates are fully realized, the bank will continue to carefully monitor market developments and to ensure the stability of the money market. it will also carefully assess the future outlook for economic activity and prices, closely considering the