policy measures. let me move on to the longer - term issues associated with vulnerability to unanticipated external shocks. as i mentioned earlier, steady capital inflows are beneficial in bringing about welfare - improving efficiency in the long run. in order to ensure their benefits, i would like to emphasize the importance, here in asia, of long - term policy efforts to develop more liberalized, deep, and well - balanced financial markets, or i may say, a better financial infrastructure or architecture. deep and well - balanced financial markets, side - by - side with free and stable capital flows, enhance the effectiveness of resource allocation. it should be emphasized that liberalized and deep financial markets also strengthen the effectiveness of macroeconomic policies, through improvements in the monetary transmission mechanism. the asian authorities are together in having recognized this long - term perspective, and they have been making collaborative efforts over the past decade to develop their financial bis central bankers ’ speeches markets, particularly their bond markets. examples of such efforts include the asian bond fund ( abf ) initiatives launched by the emeap, 4 in which the bank of japan also takes part, and the asian bond markets initiative ( abmi ) of the asean + 3 process. 5 asian financial markets have developed remarkably in recent years thanks to these policy efforts ( slide 3 ). nevertheless, they are still much smaller and less liquid than their counterparts in advanced economies, magnifying the impact of short - term volatility of capital flows on their stock and bond prices, and accordingly on their foreign exchange rates. in particular, the secondary and repo markets as well as the primary markets for corporate bonds remain relatively underdeveloped in the region, compared with the expanding primary markets for government bonds. this situation needs to be addressed through more cooperative and collaborative efforts among asian economies, including japan. moreover, in a broader sense of the infrastructure issue, there is still an excess of regulations on cross - border transactions, including those applied to foreign exchange, overseas remittances, and foreign inward investments, as well as an over - complex taxation system. the lack of transparency is often criticized, as well as the seeming arbitrariness found sometimes in the enforcement of such regulations. they remain an impediment to the promotion of transactions and to the development of liberalized and deep financial markets in this region. 4. improving payment and settlement systems in asia : respect free markets i would like to emphasize the utmost importance of improving the post

many of the small and medium - sized financial institutions will find their business base taken over by the larger institutions. looking at the situation in europe and the united states, however, i feel that there is a tendency for financial institutions to become specialized in the present financial environment. while it is true that some financial institutions might seek to provide comprehensive financial services, they will not be able to survive the severe competition by merely expanding the scale and scope of their operations. those institutions will also have to develop areas or niches in which they can be competitive to secure the base for their existence. it is thus strongly expected that each financial institution will advance its know - how and expertise in its particular areas of strength so as to provide quality financial services. while market reform in japan will thus intensify competition among financial institutions, i am of the view that it will not directly cause the small and medium - sized financial institutions to lose their business bases. v. conclusion the reform of the financial markets involves numerous issues besides relaxation and removal of existing regulations and improvement of the institutional framework of the legal, tax, and accounting systems. review of public financing and adequate regulation and supervision, for example, are important considerations. the revision of the bank of japan law should also be perceived as part of the process of reform of the japanese financial markets and the financial system. with regard to the revision of the bank of japan law, a bill to amend the entire law was submitted to the diet in march following intense deliberations by the central bank study group, an advisory panel to the prime minister, and by the financial system research council, an advisory committee to the minister of finance. the bill aims at establishing a new central bank system founded on the two basic principles of independence and transparency. underlying the amendment proposal is the perception that in order to improve the efficacy and flexibility of monetary policy amid the changes occurring in the global environment surrounding the japanese financial markets, which i have discussed today, the legislation based on which the bank of japan operates must be appropriate for a central bank in the new age. i strongly hope that the bill will have a smooth passage following diet deliberations. at the same time, we at the bank of japan are determined to strengthen our efforts to reform the bank to ensure appropriate policy and operational management. in closing, i would like to ask for your continued understanding and cooperation.