policymakers proceed down this middle path? first of all, we need to learn - - we need to understand and evaluate the innovations that are taking place in financial markets. this process should include information sharing with other authorities, including those in other nations, in order to benefit from the experiences in other markets and regions. the resulting improved understanding is often enough to prepare policymakers to deal with any breakdowns that do occur and to avoid having the breakdowns turn into systemic problems. the u. s. response to the century date change is an example from a different context that fits into this category. in that case, policymakers worked hard to understand the complex practical issues and to share that knowledge with financial firms. those firms independently evaluated the risks they faced and took appropriate action to manage them effectively. improved understanding may also ease concerns about potential risks. for example, in light of the effects of financial consolidation on the number of firms acting as dealers in the market for dollar interest rate options, the federal reserve became concerned about possible risks to the functioning of that market. these concerns included questions about the adequacy of risk management at the remaining dealers and about the possible effects that problems at one of those dealers could have on its counterparties and market liquidity. however, further investigation by federal reserve staff suggested that market participants were generally managing their market and counterparty risks effectively and that those hedging risk in the options market would not unduly suffer from a temporary disruption in liquidity. our wariness about concentration in this market has not disappeared as a result of our improved understanding, but it has diminished. in general, improved knowledge about financial innovations may prevent the imposition of unwarranted restrictions and is surely a precursor to intelligent regulation in the event it is warranted. a second step for policymakers walking the middle path should be to ensure that market participants have the proper incentives and the information they need to protect themselves from any problems related to new products, markets, or institutions ; by so doing, policymakers can perhaps mitigate those problems. policymakers should insist that regulated firms effectively manage the risks associated with new activities and markets, thereby fostering effective market discipline of risk - taking, including risktaking by unregulated firms. such an insistence generally does not require new regulation but rather is an application of existing regulation in a potentially new context. one of the lessons of the difficulties at long - term capital management ( ltcm ) was that the hedge fund had been able

in facilitating corporate funding. looking back at the 1997 - 98 period, a series of collapses of financial institutions triggered a credit crunch. at the time, being concerned about their own funding, there were cases where financial institutions could not respond even to the funding needs of large blue - chip firms. however, we have not confronted such a situation since we adopted quantitative easing. i think the probability that a similar situation will occur is much smaller compared with the 1997 - 98 period. through these channels, quantitative easing has been firmly supporting economic activity. but, we should never be complacent. we are determined to make further efforts to improve the transmission mechanism so that the effect of quantitative easing will permeate the economy to the fullest extent possible. as part of such efforts, the bank recently decided to purchase asset - backed securities ( abss ). the necessary preparations having been completed, we will be ready to purchase the securities in the near future. policy commitment there are other measures to stabilize financial markets. for example, the bank has committed itself to continuing its current monetary easing framework until the growth rate of the consumer price index ( cpi ) stably registers zero percent or above. this can be termed the “ policy duration effect. ” with such a commitment as a backdrop, interest rates for overnight to several years have been stable at very low levels. in fact, the rise in medium - term interest rates has recently been relatively moderate despite the substantial increase in long - term rates. we fully recognize the importance of stabilizing public expectations about future policy directions, and we will make further efforts to enhance transparency regarding the conduct of monetary policy. 3. promoting financial system stability the second contribution of the bank is to secure financial system stability by urging financial institutions to enhance their soundness. for the past ten years, the financial system problem in japan has been almost synonymous with the nonperforming - loan ( npl ) problem. however, it goes without saying that what is really important is for financial institutions to overcome the npl problem and transform themselves into a new financial service industry equipped with renewed competitiveness. major financial institutions must quickly become competitive in the international financial market, and regional financial institutions should provide new financial services to small firms which undertake or develop new businesses that contribute to the development of local economies. having said this, it is true that the npl problem is still formidable. in the paper titled “ japan ’ s nonperforming loan problem ” published in october 2002, the