masaaki shirakawa : international policy response to financial crises remarks by mr masaaki shirakawa, governor of the bank of japan, at the federal reserve bank of kansas city's annual economic symposium, jackson hole, wyoming, 21 august 2009. * * * introduction i will explore the future of international coordination between central banks in the wake of the current financial crisis. here, i mean by coordination between central banks that they attempt to respond to and stave off a global crisis effectively in an organized way without any outside pressure. the current crisis has posed enormous challenges on many fronts to policymakers. as the starting point for discussing those challenges, i think it is important to highlight three facts. first, the global economy has encountered a crisis more frequently in the past 20 years than before. second, the current crisis has grown literally into a global crisis. the global economy has contracted sharply since the fall of 2008, as often described as falling off a cliff. by contrast, the prior crises such as japan ’ s post - bubble period and the east asian crisis still remained local, even though they exerted significant adverse effects on the domestic or regional economy. 1 third, the soundness of financial institutions before the crisis differed significantly between those countries in question. asian financial institutions, including japanese institutions, as well as canadian and australian ones, had smaller exposure to complicated structured products, compared with u. s. and european institutions. those three points provide a sound basis for considering how to forestall a crisis. causes for global financial crisis here, i will try to summarize some stylized facts about the unfolding of crises, including the current one. during a pre - crisis period, benign economic conditions, just like the “ great moderation ” prior to the current crisis, usually prevail for some time, and the risk - taking attitude of economic agents becomes aggressive. in economic analysis, economic agents ’ preferences are assumed to remain unchanged over time. but, in reality, risk perception becomes optimistic and risk tolerance is elevated under benign economic conditions. unfortunately, our knowledge of a mechanism of such endogenous changes in the risktaking attitude, or risk - taking channel, is quite limited. institutional arrangements, such as regulation, valuation, and compensation, shape incentives at a micro level. given institutional arrangements, an actual implication of such incentives is importantly influenced by the financial and economic environment at a macro level. in that respect, low inflation and high growth coupled with low volatility

##20 and financial stability board ( fsb ) fisher ( 2009 ) emphasizes the importance of incentives as the principle lesson from the current crisis. see goodhart ( 2009 ) for an assessment of the anglo - saxon model of banking and financial regulation and supervision in light of the current crisis. have correctly proposed to review the capital adequacy standards, with a reservation of implementing most of the new rules once recovery is assured. 10 such a policy direction seems relevant in light of the amount of risk actually taken by internationally active financial institutions in recent years. in implementing the policy, however, we also need to pay attention to the endogenous changes in financial institutions ’ risk - taking stemming from strengthened capital regulation. finally, coordination between central banks is required in the area of money market operations, and, more generally, banking policy. a crisis is likely to be amplified by concern over funding liquidity. that underscores the importance of the efforts to transfer liquidity smoothly on a global basis. u. s. dollar funds - supplying operations, carried out under coordination between major central banks, have been highly effective under such conditions. in that case, other central banks than the fed have an incentive to implement operations to secure the stability of domestic financial markets and domestic financial institutions. the fed also has a natural incentive to secure the stability in u. s. dollar denominated financial markets. as a result, u. s. dollar funds - supplying operations are mutually beneficial for both the fed and other central banks. that point is markedly different from “ international policy coordination ” in monetary policy, easily placing strain on bilateral relations in key variables, such as foreign exchange rates and the balance of payments. through the current crisis, we have reconfirmed that it is important to make currency swap, repo, and other collateralized markets more robust, and that central banks need to promote private initiatives in that direction. from that perspective, central banks need to make further coordination in providing liquidity, accepting cross - border collateral, and extending operating hours for the payment and settlement systems provided by central banks. concluding remarks in closing, i emphasize the importance of promoting human interaction in further developing coordination between central banks. since the summer of 2007, central banks have communicated with each other intensively at various levels, from top central bankers to mid - class staffers using various tools, such as emails, conference calls, and face - to - face conversations. such efforts have contributed to preventing the crisis from worsening further.