never recover unless structural problems are solved. needless to say, some kind of structural problems always exist at any point in time in any economy, and i do not deny that japan currently faces extremely big problems. moreover, it should be remembered that at the same time we also experience business cycles. on the other hand, it is not correct to claim that an economic recovery has nothing to do with structural problems. if structural reform does not proceed smoothly, economic recovery will lack strength, or big problems will remain unsolved even after the economy recovers substantially as evidenced by the situation in japan after the bursting of the bubble. i think it true to say that economic recovery would be all the more robust if accompanied by the progress of structural reform. the nature of structural problems may differ from time to time and from country to country, and it is not easy to come up with a clear - cut definition. having said this, the current structural problems in japan could be characterized as arising from the process of the economic system adapting to a new environment, in other words, it is a problem that has contained the dynamism of the japanese economy. indeed, changes in the economic environment in the 1990s such as the progress of information and telecommunications technology and the globalization of market economies had a substantial impact on japanese firms in persuading them to change. the aftereffects of the bursting of the bubble can also be recognized as a structural problem in that they prevented firms and financial institutions from adapting to the change in the environment by eroding their financial strength. significant changes in the environment can make an existing economic system obsolete and reduce profitability of the corporate sector. particularly when the magnitude of change is large and firms are uncertain as to how to adapt, many initially tend to be defensive in their response by reducing investment and employment, which only leads to further downward pressure on the economy. in the process of cost reduction, however, firms that recover profitability and discover ways to adapt to the new environment will gradually increase in number. then, the way a firm overcomes structural problems itself will become a source of new growth. this is the stage where firms take the offensive in that they implement comprehensive reform of their management system geared toward the new environment and invest in strategically important areas or new businesses. though even at this stage there will exist not a few firms which are still defensive, the overall picture is that the economy will recover as structural reform progresses. and, as the number of firms taking the offensive

also, not every country experiencing this sort of demographic change has a malign property bubble and a financial crisis. therefore, we should not think of this strong positive correlation between demographic factors and malign bubbles as a strict causal relationship. rather we should regard the demographic conditions of population dividend as “ fertile ground ” for malign property bubbles. see, for example, takats, elod ( 2012 ) : “ aging and house prices ”, journal of housing economics, vol 21, no 2, june, pp 131 – 41, and nishimura, kiyohiko g. ( 2011 ) : “ population ageing, macroeconomic crisis, and policy challenges ”, panel discussion at the 75th anniversary conference of keynes ’ general theory, university of cambridge, 19 – 21 june 2011. see nishimura and takats, “ ageing, property prices, and money demand ” work in progress, which includes both theory and empirical analysis of a panel of 22 advanced economies. bis central bankers ’ speeches in the final analysis, malign property bubbles can be considered a manifestation of overly optimistic expectations at their extreme. 5 since the financial crisis, many attempts have been made in the economic profession to explain malign bubbles as the consequences of rational economic agents acting under circumstances of asymmetric information and certain not - soefficient regulatory conditions. these explanations are quite ingenious, using arrays of sophisticated neoclassical apparatus. however, from the practitioner ’ s viewpoint, it is more helpful simply to admit the frailties of human nature whereby we are so prone to be overly optimistic in some cases ( and overly pessimistic in others ), and our decisions are so easily influenced by other people ’ s opinions, especially the opinions of those in the higher realms of policy making. i will come back to this point later. 2. how to respond to a malign bubble let me now turn to the second issue, which is how we should respond to a malign bubble. fundamentally, we should distinguish two stages in the history of a malign bubble. the first is the early or prevention stage of the bubble, while the second is the late or collapsing stage. when considering our response to the early or prevention stage of a bubble, a consensus seems to have emerged in favor of the so - called bis view. first, use various macroprudential policies to rein in overly optimistic expectations in the market. second, if the bubble is truly malign, we should not hesitate to use