haruhiko kuroda : opening remarks opening remarks by mr haruhiko kuroda, governor of the bank of japan, at the 2013 bank of japan - institute for monetary and economic studies ( imes ) conference, hosted by the imes of the bank of japan, tokyo, 29 may 2013. * i. * * introduction good morning, ladies and gentlemen. it is my great honor to say a few words at the beginning of the 2013 boj - imes conference. on behalf of my colleagues at the bank of japan and myself, i would like to welcome all the participants from the academia, central banks, and international organizations. this year, we are going to tackle the issue of “ financial crises and the global financial system. ” it is no doubt a very familiar theme for all of you. in fact, we have discussed this topic time and again. every time we faced an international financial crisis – we had far too many of them – the international financial system had to evolve in response, and that called for new ideas, or at least, new twists on old ideas. this was no easy task, as many of you, who were my colleagues in arms, would attest without any hesitation. working on the front lines of international finance in the recurring process of turbulence and evolution of the global financial system, under many different hats, i have always struggled with seemingly intractable problems, such as large fluctuations in the exchange rate and huge swings in the flows of capital. in retrospect, past discussions and responses regarding the global financial system did not follow a straight line. we saw a series of trials and errors. karl popper, who was a philosopher of scientific methodology, mentioned that for the quest of the truth, “ there is no more rational procedure than the method of trial and error. ” 1 through repeated trials and errors in every past financial crisis, economics has actually accumulated new wisdom. as we face the formidable task of rebuilding the international financial system severely hit by the most recent financial crisis, our trials and errors from the past will certainly provide us with valuable insights. ii. the role of the trilemma of international finance in the evolution of the global financial system in light of wisdom that has been accumulated so far, the starting point of discussion on the organization of a global financial system is the trilemma of international finance. as you know, the trilemma shows that no economy can simultaneously achieve the three goals of capital mobility, a fixed exchange

rate, and independent monetary policy. global financial systems were adopted under the constraints of this trilemma. when an adopted system became unsustainable, the result was a financial crisis, leading to the adoption of a new global financial system. this cycle was repeated many times over. let me briefly turn to a few historical examples. at the end of world war ii, the bretton woods system was introduced to solve several problems that had occurred during the interwar period, including competitive devaluations. with controls over capital mobility, this system allowed the simultaneous pursuit of independent monetary policy and the peg to the u. s. dollar, which was exchangeable with gold at a fixed rate. in the 1960s, against a background of deteriorating u. s. balance of payments, there were changes in the international financial environment : the amount of u. s. dollars held by non - residents increased and the eurodollar market came into being and popper, karl, “ science : conjectures and refutations, ” conjectures and refutations, routledge and kegan paul, 1963. bis central bankers ’ speeches expanded. under such circumstances, the u. s. gold reserves continued to flow out and as the world became more uneasy with the convertibility of the u. s. dollar, the bretton woods system was abandoned. consequently, advanced economies maintained independent monetary policy, while adopting the floating exchange rate system and further liberalizing capital mobility. a few decades on, in the 1990s, currency crises hit a number of emerging economies, such as mexico, thailand, indonesia, south korea, russia, and brazil. against a background of increasingly liberal capital mobility and the accompanying growth of capital account transactions, the principal driver of the crises was the unsustainable current account deficits in many of those economies with de facto u. s. dollar - pegged exchange rates. after the crises, the economies have pursued independent monetary policy and have increased the flexibility of their exchange rates, while upholding capital mobility. moreover, taking into account the lessons of the currency crises, asian emerging countries have significantly increased their foreign exchange reserves and have promoted regional financial cooperation, such as the cheng mai initiative. in sum, the evolution of the global financial system to date is heavily influenced by the episodes of past financial crises, at the same time constrained by the trilemma of international finance. iii. issues for the rebuilding of a global financial system after the recent global financial crisis the recent financial crisis