the bank of japan ’ s january report of recent economic and financial developments bank of japan, communication, 6 / 2 / 98. summary japan ’ s economic growth remains stagnant. sluggish domestic demand, especially household expenditures, has been exerting negative influence upon production, employment and income. corporate sentiment has also weakened. with respect to final demand, net exports have continued to increase, and business investment has been rising moderately, mainly in the manufacturing sector. meanwhile, private consumption has continued to stagnate, reflecting cautious household sentiment that has persisted even after the rebound of the front - loading expansion of spending prior to the consumption tax hike had subsided. housing investment has continued to be weak and public - sector investment has been decreasing. reflecting the weak final demand, inventory adjustment pressures have been spreading, and industrial production has been on a slightly declining trend. the pace of improvement in employment and income conditions has also been slowing. thus, the positive growth cycle of production, income, and expenditures has stalled. as regards the outlook of the economy, external demand is expected to continue upholding the economic growth, and the special tax - cut measures announced in december 1997 are expected to have positive effects on household spending. overall, however, the economy is likely to remain stagnant for a while, due to the intensifying pressures of inventory adjustment, the continued decline in public - sector investment, and the anticipated deceleration in business fixed investment. given the slowdown in the pace of growth, the economy is considered to be vulnerable to further negative impacts. in these circumstances, the possibility of the emergence of further downside risks should be carefully observed, such as prolonged and intensified adjustments in the asian economies, more restrictive lending stance of financial institutions impeding corporate finance, or further deterioration of confidence in the corporate and household sectors. with regard to prices, wholesale prices have declined reflecting a slack in the supply and demand conditions of goods. meanwhile, consumer prices have remained at a level slightly above that of the previous year when observed excluding the effects of institutional changes such as the rise in the consumption tax rate. thus, prices on the whole remained stable. prices are likely to be steady in the immediate future, since downward pressures on prices are not as significant as was the case in 1995, when the yen ’ s appreciation induced a penetration of imports, which then directly dampened prices of import - competing domestic final goods, arousing concerns for a deflationary spiral in the economy. however

kiyohiko g nishimura : macro - prudential lessons from the financial crises – a practitioner ’ s view speech by mr kiyohiko g nishimura, deputy governor of the bank of japan, at the asian development bank institute ( adbi ) – central bank of malaysia ( bank negara malaysia / bnm ) conference on macroeconomic and financial stability in asian emerging markets, kuala lumpur, 4 august 2010. * * * i would like to express my sincere gratitude to the hosts for inviting me to the adbi – bank negara malaysia conference, and especially to this timely session : macroeconomic frameworks to support financial stability. in this presentation, i will touch on the issues of financial stability and central bank policies, based on two episodes of financial crisis : one dating from 20 years ago in japan, and the other from two years ago in the united states. i first present one “ stylized account ” from a macro - prudential perspective of the buildup in financial imbalances that led eventually to the financial crisis in the late 1980s in japan. then, i illustrate the startling similarities between the recent us subprime - triggered experience and that of japan in the 1980s. examining these two crises, i will draw four implications for macro - prudential policy which are likely to be universally relevant, particularly in emerging economies. the message is simple and straightforward : beware. so - called macro - prudential measures may not always be sufficient. this leads to the final topic, the role of monetary policy during the buildup of financial imbalances, a role which i would argue is, in a word, crucial. i will explain why in the course of this presentation. 1. financial imbalances in 1980s japan : a stylized account i first present one “ stylized account ” from a macro - prudential perspective of the buildup to financial imbalances in japan in the late 1980s. 1 this account is intended to be rather descriptive and schematic in the way that macro - prudential issues are highlighted. it is admittedly simplistic, but i believe this is a good starting point for discussion. deregulation - induced “ financial innovations ” and financial anomalies a number of “ financial innovations ” introduced as a result of deregulation appear to have played a role in the late 1980s bubble in japan. under the designation of financial liberalization, deregulation sparked the arrival of new products such as cps and large