operations lengthened, running for ten months in bill - purchase operations at the final stage of the quantitative easing policy. “ quantitative easing ” is often used in a rather vague manner, but the policy action we adopted can be regarded as a pure form of “ quantitative easing. ” third, the bank adopted “ credit easing ” in the current terminology. the assets purchased included asset - backed securities ( abss ) and asset - backed commercial papers ( abcps ). fourth, the bank made a commitment to continuing with the zero interest rate policy and the quantitative easing policy. the conditions for commitment were expressed as “ until deflationary concerns are dispelled ” at the time of the zero interest rate policy and “ until core cpi inflation becomes stably zero or above ” at the time of the quantitative easing policy. fifth, the bank took unprecedented measures to secure the stability of the financial system, including purchases of stocks held by financial institutions. you may find the striking similarities between the policy measures formerly taken by the bank of japan and those currently taken by central banks in major countries. i never imagined that a host of unconventional measures taken by the bank of japan would be adopted by other central banks just a few years later. i also guess that my colleagues at central banks in other countries never imagined employing such policy measures. of course, such measures are not perfectly identical, reflecting the differences in the structure of financial intermediation and severity of stress in financial markets, as well as the differences in legal and social restrictions on policy measures available for central banks. notwithstanding such differences, the aforementioned striking similarities stand out. it is quite natural that a central bank facing a financial crisis takes similar measures, because a central bank, after all, pursues the same objectives with the same capacity, that is, the capacity to adjust the amount of liquidity in the economy. 3 among the papers contributed to the conference, goodfriend ( 2009 ) argues central banking under financial turmoil by classifying central bank initiatives into monetary policy, credit policy, and interest rate policy. importance of liquidity this leads me to discussing liquidity, which, i think, is the most important concept in understanding the current financial crisis, though it is hardly possible to sort out a single factor. during the expansion period of the credit bubble, it was complacency based on unfounded expectations about the unlimited availability of liquidity behind the aggressive risktaking attitude. by contrast, during the period of bubble bursting, it was fear of the

exhaustion of liquidity that caused an extraordinary contraction of economic activity. in addition, liquidity conditions significantly changed the valuation of financial assets, thereby influencing the capital positions of financial institutions. here, i use the term of “ liquidity ” as the concept incorporating both funding liquidity and market liquidity. but i have to admit that “ liquidity ” is hardly defined precisely and measured exactly in a quantitative manner, and thus it remains somewhat elusive. nevertheless, anybody can surely assess “ liquidity ” to a certain extent. after all, liquidity is the core concept in understanding interdependence between the real and financial sectors of the economy from the beginning of central banking. the principal function of central banks has been and will be the guardian of liquidity. from the standpoint just i mentioned, it is crucially important for a central bank to adequately control the aggregate amount of liquidity in the economy. please note, however, that the concept of liquidity here does not necessarily correspond just to the terms of broad monetary aggregates or reserves. in fact, the reversed correlations between money stock and economic activity are almost consistently observed in recent years in japan : money stocks increase when economic activity weakens, while they decrease when economic activity expands. the money multiplier is also quite unstable. challenges for central banks if this is the case, what does it mean practically to say liquidity is important? i will touch briefly upon some issues and challenges for central banks, based upon the recent experiences. first of all, i want to draw your attention to a fine line between liquidity provision and capital provision. currently, central banks are faced with an imminent challenge of implementing unorthodox policy measures. the traditional role of a central bank is in providing liquidity. in times of crisis, a central bank attempts to provide liquidity aggressively sometimes with taking some credit risk. the relaxation of collateral eligibility is a case in point. in a dysfunctional market where prices are not “ discovered, ” it is not so certain that a central bank is protected from credit risk, even if central bank lending is “ collateralized. ” that makes it difficult to distinguish liquidity provision from capital provision. outright purchases of credit instruments imply that a central bank shoulders credit risk in a more straightforward manner. in that regard, monetary policy approaches the region of fiscal policy. under such circumstances, a central bank should be cautious about the risks of undermining its credibility which is prerequisite for any policy implementation