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

employees or fewer. outstanding loans for medium - sized enterprises are calculated by excluding those for small enterprises and large enterprises from total outstanding loans. figures are deflated by gdp deflators. total borrowings in 1975 in real terms = 100. source : economic statistics monthly, bank of japan and national accounts, cabinet office. chart 5 bank lending to real estate - related sectors note : all banks, excluding member banks of the second association of regional banks. real estate - related sectors include real estate, construction, and non - bank financial. total outstanding loans used for calculations are outstanding loans and discounts to domestic corporate borrowers, excluding overdrafts. outstanding loans to the non - bank financial industry are the sum of those to the other financial industry and the lease industry. figures are deflated by gdp deflators. total lendings in 1975 in real terms = 100. source : economic statistics monthly, bank of japan and national accounts, cabinet office. chart 6 ratio of examining officers at the headquarters by bank - type and year source : figure 1 in fukao, k., k. g. nishimura, q. - y. sui and m. tomiyama, “ japanese banks ’ monitoring activities and the performance of borrower firms : 1981 – 1996, ” international economics and economic policy, 2 ( 2005 ), 337 – 362. overlooked signs of excessive optimism around this time, there were signs of excessive optimism among investors, especially in property markets. chart 7 illustrates the price - to - rent ratio in residential property markets in tokyo, 4 based on hedonic price and rent price indexes of condominiums, and taking due account of vast differences in quality. ( rents here are market - determined new - contract rents, not institutionally rigid continuing - contract rents. 5 ) this ratio surged from around 23 in 1986, which in retrospect looked like the long run average, to around 40 in one year, suggesting substantial overheating in property markets. after a short pause, the price - to - rent ratio shot up to a peak of around 50 in the fall of 1990 ( even after the collapse of the stock markets ). however, it should be noted here that this quality - adjusted price - to - rent ratio has only recently become available. in the late 1980s, only appraisal price indexes for residential and commercial lands were available, with a substantial lag of half a year. there were no reliable rent data. thus