century. each country is thus striving to make their own markets attractive to participants. japan, too, has engaged in the review of regulations and systems to promote financial deregulation. however, reform has been gradual and financial institutions have tended to deal with it cautiously due to the severe challenge they have had to face after the bursting of the economic “ bubble. ” as a result, the tokyo market has fallen far behind the new york and london markets in terms of its ability to develop financial instruments that incorporate new techniques. in recognition of this, prime minister hashimoto proposed the “ big bang ” deregulation package for japan. i understand that the purpose of this financial reform package is to revitalize the tokyo market as a free and active global market. the bank believes that the aims of this reform package are most appropriate and as a central bank, intends to contribute to the achievement of its goals. in carrying out the reform, it is especially important that the three basic principles of freedom, fairness, and globalization are strictly followed, and that the pace of the reform is not relaxed. the “ big bang ” package aims to realize and complete all reforms by the year 2001, immediately implementing any measures on which study has been concluded. however, this should not mean that the process of market reform become unduly gradual or slow, as this may jeopardize the consistency of the reform, or result in only an easier part of the reform being implemented. for example, one deregulation measure included in the “ big bang ” package and highly valued by the bank is the fundamental revision of the foreign exchange control law. if deregulation in other areas proceeds too slowly, the effects of the new foreign exchange control law might encourage financial transactions to shift to overseas markets and might then lead to the hollowing - out of the tokyo market. in order to avoid such a turn of events, it is most important to bring about concrete measures within the shortest possible time to maintain the coherence of the deregulation as a whole. b. revision of the bank of japan law lastly, i would like to discuss the revision of the bank of japan law. the revision of the bank of japan law is now in the final stage of deliberation by the financial system research council, an advisory committee to the minister of finance, following discussions last year by the central bank study group, an advisory panel to the prime minister. the bank has made public its views on the bank of

of their risk measurement and management of the complex financial instruments that are typically used in this model. basel ii also establishes benchmarks for recognising risk transfer and mitigation in securitisation and credit derivatives structures. it sets a boundary between the point at which a firm transfers risk and actually retains the risk. these enable supervisors to assess the degree of risk transfer and mitigation under both normal and stressed market conditions. and finally, basel ii requires that firms strengthen their frameworks for assessing appropriate capital for the trading book. this has taken on increasing importance given the rapid growth of trading book assets relative to the banking book. for example – the basel committee – in consultation with the industry – continues to work on developing a framework for better capturing the default risk associated with credit exposures in the trading book. in addition, basel ii permits firms to use their own models to measure counterparty credit risk exposures. this risk arises, for example, in otc derivatives, which are becoming increasingly complex and more difficult to measure. this approach is closely aligned with industry best practice as well as the underlying economic risks of these activities. basel ii has also paved the way for improvements in other, less visible ways. one example is basel ii ’ s greater focus on firms ’ risk management infrastructure. for instance, the framework requires fundamental improvement in the data supporting pd, lgd, and ead estimates that underpin economic and regulatory capital assessments over an economic cycle. this has spurred improvements in areas such as data collection and management information systems. these advances, along with the incentives to improve risk management practices, will support further innovation and improvement in risk management and economic capital modelling. pillar 2 let me now turn to the second pillar – the supervisory review process. pillar 2 really starts with you, the banks. first and foremost, responsibility lies with bank management for developing an internal capital assessment process and setting capital targets that are commensurate with the bank ’ s risk profile and control environment. a sound risk management process is the basis for an effective assessment of the adequacy of a bank ’ s capital. and bank management bears the primary responsibility for ensuring that the bank maintains adequate capital to support the risks beyond the minimum requirements. excessive participation by supervisors in a bank's capital adequacy assessment process or firms'over - reliance on supervisory review of their assessments are both counter to basel ii ’ s objectives and raise the risk of moral hazard. the better banks measure and manage