assets the bank holds are adequate to secure the banknotes issued. this adequacy, i believe, involves two specific points. first, the bank ’ s assets must be sound and its financial base must be solid — — the latter means that the bank must have a sufficient capital base — — in order for the bank to continue to act decisively as a central bank in total independence of intervention by a third party. second, the bank must have a sufficiently liquid asset portfolio to flexibly inject or withdraw funds as necessary. i believe that the bank ’ s balance sheet has also attracted growing attention in other countries. some observers have expressed concern over the expansion of the bank ’ s balance sheet as a sign of deterioration in its assets. this may be because a rapid growth of the balance sheet is associated in people ’ s minds with an increase in nonperforming assets that need to be disposed of at a substantial loss. but as i stated at the beginning of my speech, setting aside technical factors, the recent expansion of the bank ’ s balance sheet is primarily the result of active provision of liquidity under the easing policy. nevertheless, mere suspicion about an erosion of asset quality can be a serious problem if it undermines people ’ s confidence in the central bank and, in turn, in the national economy. such loss of confidence could, for example, result in japan ’ s commercial banks and firms paying an unnecessary premium when raising funds in other countries. that is why the bank recognizes the need to be vigilant against deterioration in its assets. the policy board, the bank ’ s decision - making body, constantly deliberates whether the various measures implemented to fulfil the bank ’ s mission could jeopardize the bank ’ s credibility because of the resulting changes in its balance sheet. b. three key principles of the bank of japan ’ s portfolio selection i will next talk about the philosophy that guides the bank in portfolio selection — — in other words, the key principles in selecting a central bank ’ s portfolio. there are three. the first principle is to maintain the soundness of the bank ’ s assets. in other words, assets and collateral held by the bank must be of high quality. the bank has devised a number of methods to achieve this. when supplying funds to financial institutions through loans, the bank acquires financial assets that are trustworthy as collateral. when providing funds through market operations, it purchases financial assets from financial institutions or other sellers based on rep

of the japanese economy. perhaps “ ensuring the functions of the currency ” sounds a little too abstract. specifically, the bank must first ensure the stability of the currency ’ s value, and second maintain an appropriate framework for its circulation. referring to these two requirements, the role of a central bank is often defined as maintenance of price stability and financial system stability. on a day - to - day level, the bank seeks to fulfil its mission by engaging in banking activities that are similar to those of commercial banks. when the economy is experiencing inflation or deflation, the bank tries to restore and maintain a non - inflationary and nondeflationary situation — — that is, a situation of price stability — — by influencing the quantity of money in circulation and the levels of various interest rates. the bank achieves this objective by influencing interest rates in the financial markets. and this is done basically by supplying or absorbing the appropriate amount of funds through the purchase or sale of financial assets. such activity by the central bank is called “ market operations. ” the same is true of the bank ’ s activities to maintain an orderly financial system. when the stability of the financial system is at risk due, say, to failure of a commercial bank, the bank of japan acts decisively to minimize the ensuing disturbance by injecting funds into the system. the principal tool the bank employs in such cases is lending. as with commercial banks, the activities of the bank are clearly reflected in its assets and liabilities shown on its balance sheet. for instance, when the bank drastically eases money in order to avert deflation, as is the case at present, the bank increases provision of funds in the – 3 – markets by increasing its purchase of financial assets. this naturally causes the bank ’ s balance sheet to expand. the key question is whether or not people will trust their central bank and be willing to hold the country ’ s currency ( including banknotes, which bear no interest ). this depends on whether or not the central bank ’ s behavior has measured up to the expectations of the people, and whether or not it continues to do so. one source of clues for making such a judgment is the balance sheet, and it is therefore natural that people in japan and abroad take a keen interest in the bank ’ s balance sheet. the bank ’ s balance sheet can be discussed from various perspectives. from the viewpoint of people ’ s confidence in a central bank, it is most important that the financial