a bubble, in the sense of a speculation - driven price increase, has indeed formed. central bankers are not more ignorant than investors and traders, nor are they more intelligent or better informed when it comes to the valuation of companies. one might argue that a crash is not so much the result of exuberant cash flow expectations for individual companies but rather the consequence of a sudden increase in discount rates, causing a dramatic downward adjustment of all present values. the relevant discount factors are the combined result of time preference, risk preference, and the prevailing perception of uncertainty. history has taught us convincingly that time preference is a relatively stable factor. the problem, therefore, lies more in a sudden shift of risk preference and the perception of uncertainty. if these two determinants could be stabilised, much would be achieved already. this task, however, also presupposes some “ superior knowledge ” and “ deeper insight ” on the part of central banks relative to the market. such assumptions are unrealistic. moreover, central banks, with the instruments they have at their disposal, do not have the possibility to deflate a presumed bubble all on their own. interest hikes would certainly be a possibility. in so doing, however, one would have to accept consequences in the real sector which could be completely counterproductive. finally, if central banks were obligated to avoid stock market excesses, this would have extremely disastrous moral hazard implications. to be realistic, a simple recommendation is all that is in order : those who buy equities bear the price risk themselves. people who, out of greed and carelessness, buy and sell in such a way that they cannot survive a brutal crash have only themselves to blame. they must bear the consequences alone, even if it means their economic ruin. second, there is also an argument that price stability as the relevant goal of monetary policy should be defined more broadly and measured in such a way as to include the development of important asset prices. 4 the demand that monetary policy, in its use of the concept of monetary conditions, should not only take account of interest rates and foreign exchange rates but also of equity prices does not go quite as far. on a technical level, such an expansion of the price index would not be a trivial undertaking, but certainly doable. there are some serious economic concerns, however, which are mainly due to the ambivalent nature of equity price fluctuations. equity prices may rise in anticipation of a pick - up in

to the economy ’ s size. for two economies with the same amount of debt, the one with higher growth potential can lighten the burden of excess debt faster. having said that, growth potential is not fixed and can change as a result of policy measures and the response of the society after a bubble bursts. in that sense, avoiding collateral damage from the bursting of a bubble becomes extremely important. bis central bankers ’ speeches collateral damage could materialize in various ways. for example, in a low - growth economy that is in the process of deleveraging, social stress tends to intensify and is more likely to result in a rise in protectionism and excessive government intervention. when lending to nonviable firms continues for political or social reasons, the resultant decline in productivity growth will lower growth potential. furthermore, monetary policy can also distort economic incentives. low interest rates and abundant liquidity are necessary but if they continue for a long time, they may lower productivity by keeping inefficient firms alive. necessary adjustment will also be delayed if low interest rates discourage the government from making efforts to restore fiscal balance. population decline will also prolong the adjustment of excess debt by lowering growth potential. although these are common problems for the developed world, the decline in population growth and aging of the population profile are most serious in japan. the rate of population growth is lower in japan than in the united states, the euro area, and the united kingdom. more importantly, the fast pace of decline in the population growth rate has been placing burden on japan ’ s economy and society. also, compared to japan, the contribution to population growth from immigration is significant in the united states and many european countries. however, this contribution from immigration could diminish if the stagnation of economic activity is prolonged ( charts 15 and 16 ). the third factor is the growth rate of the global economy. since the early 2000s, japan ’ s economy gradually overcame the post - bubble effects of deleveraging. however, japan was also greatly helped by the high growth in the global economy at that time, growth that was almost unprecedented in the past several decades ( chart 17 and 18 ). in retrospect, during that period, the global economy was in the very process of creating a global credit bubble and also led by strong performance of emerging economies. given that growth rates in developed countries are currently restrained by post - bubble deleveraging effects, it is now of prime importance that emerging economies continue