mechanism of drying up market liquidity has not yet been fully investigated, central banks have been making efforts to restore market liquidity by means of their own banking functions. in that regard, the bank of japan has shown itself to be at the frontiers. for example, in 2001 it introduced a new method of liquidity provision with relatively longer maturities to a wider range of financial institutions. this is equivalent to the term auction facility ( taf ) introduced by the fed in december 2007. in 2001, the bank of japan introduced a standing facility to financial institutions including securities companies. 2 it corresponds to the primary dealer credit facility ( pdcf ) introduced by the fed in march 2008. in addition, the bank of japan carried out a twist operation – a mixture of liquidity provision and issuance of bills sold, where a central bank acts as a kind of broker in the money market. furthermore, it purchased asset - backed securities, and purchased stocks as for the actions taken in 2001, see bank of japan, open market operations division ( 2001, 2002 ). held by banks. all those measures were policy prescriptions aimed at revitalizing the functioning of financial markets and financial system. although they would not usually be classified as monetary policy measures, the effects of monetary policy cannot be evaluated without considering the banking policy conducted by a central bank. in the changing financial environment, central banks are bound to continuously review their operations. concluding remarks the challenges i have described are very practical for central banks. while they are all quite difficult ones for central banks to tackle, central banks should conduct their policy by finding the answers to them one by one. in such a process, central banks make the most of available academic wisdom. central banks often face situations unexplained by existing theories. for that very reason, i believe that central banks must be ever learning institutions. at the same time, we should make efforts to convey to academia whatever puzzles we have found in practice. in turn, the theories developed in academic circles would find their way to be fed back to central bank circles as valuable input for the proper conduct of monetary policy. i am convinced that candid and inspiring discussions in various aspects of monetary policy will take place at this conference, that the discussions will be applied to the future policy implementation among central banks, and that the nexus between practice and theory will push back the academic frontiers furthermore. thank you for your attention, and i wish you a big success of the conference. references bank of japan

other words, the first and the second role of monetary policy as identified by friedman are closely related to each other. while policymakers and economists understand that price stability represents a situation in which prices could remain stable in a medium to long term, inflation dynamics could evolve with a long lag and accompany nonlinear effects. against such a backdrop, if we focus narrowly on the current observed inflation rate, there is a risk that necessary monetary policy adjustments might be delayed, inducing large fluctuations in economic activities. in that regard, central banks around the globe seem to strive for exploring optimal ways to communicate a quantitative expression of price stability with different consequences. central banks under an inflation targeting regime announce the target level of inflation rate. the bank of japan and the european central bank ( ecb ) announce some kind of numerical definition of price stability, while the federal reserve provides a medium - term forecasted value of inflation given the current economic conditions and appropriate policy. the second challenge is how to design financial system policy. although we can recognize a risk of a nonlinear change of the economy such as the burst of the bubble, we cannot take preemptive monetary easing before a bubble burst. it is impossible to forecast precisely when the burst will take place. once we recognize such a change, it is appropriate to cut the policy interest rate more than the standard taylor rule suggests, as with the current policy by the fed. at the same time, the japanese experience shows that it is quite difficult to create sufficiently benign financial conditions only with a reduction in the policy interest rate when the balance sheets of firms and financial institutions are severely devastated. when looking at the current u. s. financial situation, the yields of corporate bonds with low credit standings have not been reduced yet compared with the level in summer 2007, despite the massive decrease in the policy rate. the fact suggests that in addition to the policy interest rate changes ex post, it is important to design a policy and institutional framework less prone to the formation of a bubble ex ante. while i have already mentioned possible measures in terms of monetary policy, how to align supervision and regulations remains an important challenge that needs to be addressed, so as not to let financial institutions'behaviors amplify economic fluctuations. the third challenge is the so - called banking policy of central banks. for effective monetary policy, stable financial system and well - functioning financial markets are indispensable. the events since summer 2007 have highlighted that the loss of market liquidity has played a crucial role. although the