balance sheet of a central bank differs considerably from country to country. table 1 reports crosscountry differences in corporate finance. in the united states, securities markets were far more important than in japan, and even financial institutions depend heavily on cp markets for their own finance. and the collapse of securities markets was widespread. thus, the fed was obliged to undertake massive and wide - ranging intervention. in contrast, the strain on the japanese securities markets was mostly contained in cp and corporate bond markets, and we saw a relatively smooth transition from security market funding to bank borrowing. consequently, the bank of japan ’ s market intervention was limited to cp and corporate bond markets, indirectly through the banking system, which was still functioning relatively well ( item 3 of chart 1, measures to facilitate corporate financing ). consequently, the fed ’ s increase in balance sheets is far greater than the bank of japan ’ s, which is depicted in chart 2. europe ’ s structure of corporate finance is closer to japan ’ s, so the ecb ’ s increase in balance sheets was similar to the boj ’ s. principle 2. avoid further dysfunction when we are coping with market dysfunction in some markets, it is counterproductive to take action that undermines the functioning of other markets. that is, no policy measure should damage the incentive to trade actively in financial markets, especially if these markets ’ full functioning is prerequisite for normalcy. the decision taken by many central banks to have a policy rate close to, but sufficiently above, zero is based on this consideration. 3 principle 3. provide safety nets the current financial crisis has shown how devastating the erosion of market confidence can be. when confidence is eroded, investors are “ excessively ” averse to uncertainty ( or the socalled unknown unknowns ), and become sensitive to any news having some bearing on the worst possible case scenario. 4 actions that may be rational at the level of individual market participants can lead to a " fallacy of composition, " which prevents the markets from restoring their functions. even worse, functional breakdown and confidence erosion aggravate each other. in this respect, a safety - net facility, which works like a put option to mitigate damages that would be incurred in the worst possible case, is likely to reduce the degree of this “ excessive uncertainty aversion. ” the measures to secure stability of the financial system ( item 4 of chart 1 ) were intended to be the safety - net measures we are discussing here. japanese

on prices and economic activities under the condition of severe financial market dysfunctions. thus, when market conditions improve, many of them will eventually be terminated. however, timing and sequencing are crucial : financial markets may still be severely segmented even though inter - market arbitrage starts again. market participants ’ confidence may be still fragile. in such circumstances, it is absolute necessity to avoid fallacies and misinterpretations with respect to assessing unconventional policies. i will present five don ’ ts in order to avoid the fallacies which might otherwise mislead us. don ’ t take the central bank ’ s balance sheets as a measure of monetary easing first, do not assume the size of the central bank ’ s balance sheets is indicative of the degree of monetary easing. many unconventional policy measures are designed to be selective and are tailored to a specific market dysfunction. thus, there is no common yardstick evaluating all market intervention. moreover, the usage of unconventional policy facilities declines as market functions improve. shrinkage of a central bank ’ s balance sheet reflecting this mechanism should not be interpreted as a monetary tightening but rather as a sign of improving market conditions. don ’ t look only at the segments of financial markets subject to intervention second, do not look at the conditions of only those segments of financial markets where intervention has taken place. in fact, there might be spill - over effects to other segments. given resource and capital constraints, the central banks target their market interventions quite specifically. however, in so doing, central banks expect positive spill - over effects to other segments not so targeted. a good illustration of this lies in japanese cp markets. we see improvements, as expected and hoped for, in the a2 - rated cp market even though they are not eligible for the boj ’ s purchase program. the a2 - rated cp market is apparently affected by our purchase of a1 - rated cp. don ’ t underestimate safety nets third, do not underestimate the beneficial effects of safety - net measures especially when investors ’ confidence is fragile. when market confidence is eroded, investors are “ excessively ” averse to uncertainty and tend to “ wait and see ” until they feel more confident about making market transactions. a “ safety net ” facility has some of the characteristics of insurance or put options and thus substantially reduces this sort of uncertainty. just as insurance is an umbrella for unexpected rain, a safety net builds confidence whether or not dire events come to pass. an underutilized facility does not necessarily