decisive measure of quantitative and qualitative monetary easing in april last year. at the same time, as for fiscal policy, the government launched an expansionary policy partly through a supplementary budget while taking due account of long - term fiscal sustainability. in escaping from deflationary equilibrium, in my view, monetary and fiscal policies that were independently conducted under inflationary equilibrium need to be pursued with a different approach. in this regard, the joint statement of the bank and the government announced in january last year may have been playing an important role as a coordination device that enables the collective conduct of monetary and fiscal policies. thanks to these measures taken, the latest figures in chart 2 suggest that japan ’ s economy has gradually but steadily been escaping from deflationary equilibrium. having said that, we are only halfway to achieving the 2 percent inflationary equilibrium. in view of this, what warrants attention are effects of the consumption tax hike from this april. while there are some goods, like automobiles, that seem to face a larger increase in demand ahead of the tax hike compared with the previous consumption tax increase in 1997, we would like to wait for an accumulation of data to judge the overall effects on private consumption ( chart 3 ). personally, i believe that japan ’ s economy as a whole is resilient enough to absorb the effects of the consumption tax hike. the major reasons for this are continued improvement in employment and income conditions and the absence of problems that existed in the previous 1997 tax hike. in particular, the critical difference is that, while the financial intermediation function that supports economic activity was broken due to the domestic financial crisis, which was at its peak in 1997, the financial system is in sound, robust shape this time around. put differently, the absence of a financial system problem corresponds to the fact that problems such as debt overhang, excess capacity, and excess employment that had haunted the economy at that time have been resolved thanks to subsequent efforts by firms ( chart 4 ). the bank will steadily pursue quantitative and qualitative monetary easing to make sure we put an end to this deflation. as we have said repeatedly, should the outlook for economic activity and prices change due to some risk factors, the bank will make adjustments as necessary. while overcoming this deflation is the bank ’ s manifest mission, for japan ’ s economy to move to a sustainable growth path, it is crucial to inspire private economic entities ’ bis central bankers ’ speeches entrepreneurship and dynamism in order to reinforce

at the time, a wide range of financial institutions were perceived to be facing the common problem of mounting nonperforming loans. therefore, even though these two credit cooperatives were small in size, there was a risk that the failure could drive the entire financial system into turmoil, as the problems with the failed institutions were easily associated with those faced by the surviving ones – for example, people would ask themselves, “ if those credit cooperatives failed, why can ’ t others? ” then came november 1997. in a single month, now remembered as dark november, as many as four financial institutions including internationally active ones failed in succession. sanyo securities, a middle - ranking securities firm, was among those that failed. it defaulted on borrowing from the call market, the core of the interbank market. the amount of the default by this nondepositary financial institution was only about 8. 3 billion yen – a fraction compared with the market size. but as that was the first - ever default in the call market, it sent a shockwave through market participants, and every one of them had a gnawing suspicion that those to whom they lent money might fail anytime. as a result, the call market contracted sharply and the market intermediation function was lost. when there is increased vulnerability of the financial system, even the failure of a small financial institution or non - depositary financial institution can induce a contagious systemic shock. at the time, there was a general lack of recognition about the mechanism through which a shock develops into a systemic crisis. c. lack of effective safety nets the third cause was a lack of effective safety nets. it would have been more desirable if an effective framework had been in place in normal times that could both contain moral hazard and avoid systemic risk in a balanced manner. however, in reality, the creation of such a framework lagged behind the unfolding crisis. this delayed the resolution of problem financial institutions and resulted in an escalation of the crisis. in japan ’ s financial crisis of the 1990s, policy responses were based on the principle that all depositors, including uninsured ones, should be fully protected in order to preclude a depositors ’ run. to cover the cost of the deposit protection, the failed financial institution ’ s capital would first be used. the residual amount was supposed to be covered by financial assistance from the deposit insurance corporation of japan ( dicj ). however, under the primitive legal framework of that