pacific and south asia. supervisory frameworks have been strengthened. third, many countries in the region have adopted more flexible exchange systems. last but not least, financial markets, especially local currency bond markets, have continued to develop. the development of local currency bond markets was aimed at addressing two issues. one was the so - called double mismatches, that is, currency mismatches and maturity mismatches, and the other was a bank - centric financial system. financial institutions in the region were borrowing short - term debt in dollars to finance longer - term lending in domestic currencies. this double mismatch was particularly damaging as the significant depreciation of their currencies inflated borrowers'debt burden. this led foreign lenders to refuse rolling short - term debt, which then triggered massive defaults of banks and firms. twenty years later, the degree of the double mismatches has been reduced. local currency bond markets have grown, as can be seen in chart 1, providing an alternative intermediation channel to bank - financing. today, the capitalization of asian local bond markets is equivalent to 3. 7 trillion u. s. dollars, more than 100 times larger than before the crisis. 2 we have certainly made progress. economies have become more resilient to exogenous shocks, and the financial sector has developed significantly. in addition to these individual efforts, various initiatives have been established through regional cooperation. for example, a regional financial safety net, the chiang - mai initiative multilateralization, has been set up by the asean countries, together with china, japan, and korea, or asean + 3. the asian bond market initiative ( abmi ) was launched in 2002 by asean + 3, and this has contributed to the development of local currency bond markets. market associations and self - regulatory organizations, such as yourselves, have also played an important part in enhancing the efficiency and transparency of the markets. the total is as of june 2017 and covers nine countries and regions, including china, hong kong, indonesia, korea, malaysia, the philippines, singapore, thailand, and vietnam. the scaling factor compares june 2017 with june 1997 with reference to comparable four countries and regions, including china, hong kong, korea, and thailand. data are taken from asian bonds online. challenges remaining however, important challenges still remain. today, i will focus on the importance of further developing local currency bond markets, partly because i am surrounded here by people from the securities industry

to say that none of them yet seems to provide a completely convincing explanation. and although different mpc members place different weights on the possible explanations, we all agree that there is considerable uncertainty as to how productivity will evolve as the recovery proceeds. unemployment is certainly not a perfect guide to slack in the labour market. for instance, the recent increase in the number of workers wanting to work more hours suggests it understates the absolute level of slack1. but it is not unreasonable to expect this margin of “ potential hours worked ” to move in line with unemployment. and, unlike in the 1980s, we have not seen a substantial movement in the labour force participation rate, which suggests that the number of discouraged workers has not risen markedly. so overall, changes in the unemployment rate are, we think, likely to provide a reasonable guide to the evolution of labour market slack. now consider what will happen if the weak productivity performance of recent years is simply a consequence of the weak state of demand and so reverses as the recovery proceeds. in that case, businesses will be able to supply the extra demand without greatly expanding their workforces and unemployment will be slow to fall. in these circumstances, it is indeed appropriate to keep monetary policy loose as potential output is well above actual output. conversely, suppose that the financial crisis and subsequent recession has wrought lasting damage to productivity. in that case, unemployment is likely to fall faster as demand grows, meaning that unemployment will reach the 7 % threshold sooner. then it will be appropriate to tighten policy sooner in this case, as potential output will be lower. the only case where the linkage of policy to unemployment is potentially problematic is where there is scope for productivity to increase as demand recovers, but for some reason firms take on extra labour before the increase in productivity takes place. but this seems rather unlikely to me. in any case, it is important to realise that the 7 % threshold does not constitute a trigger for the mpc to raise bank rate. rather it represents a prompt for the committee to undertake a see bell, d n f and blanchflower, d g ( 2013 ) ‘ underemployment in the uk revisited ’, national institute economic review, no. 224. bis central bankers ’ speeches broad assessment of the prospects for demand, supply and inflation. if it appears that there is still a substantial degree of slack in the economy which can be absorbed without threatening the achievement of the 2 % inflation target in the medium term, then there will be