bank steps in to provide liquidity as mmlr, market liquidity will not automatically improve. as a result, the central bank will face a difficult decision as to how far it is prepared to go. depending on its own actions as mmlr, not only will those actions affect the stability of the financial system and the effectiveness of monetary policy, but they will also endogenously influence the central bank ’ s own financial soundness. if the central bank ’ s actions as mmlr are able to set in motion a process of reviving market liquidity, the market prices of the assets that the central bank had purchased or accepted as collateral will stabilize, thus safeguarding its equity capital. if, in contrast, the central bank attempts to defend its balance sheet – and hence the confidence in the central bank – and limit its capital exposure by holding back on liquidity provision as mmlr, market liquidity might continue to decline, which would, in turn undermine the value of the assets that the central bank had purchased or accepted as collateral, eventually risking a hit to its equity capital. an erosion of the central bank ’ s financial soundness resulting in a loss of its credibility may compromise its ability to implement monetary policy and ultimately the effectiveness of such policy. in addition, losses incurred by the central bank would hurt taxpayers as transfers to the government are reduced and its actions as mmlr would inevitably impinge upon microlevel resource allocation, which implies that they are quasi - fiscal measures ( chart 4 ). at the same time, however, it is also undesirable to see the central bank not acting sufficiently forcefully as mmlr in order to minimize hits on its balance sheet. in this context, when the federal reserve introduced the term asset - backed securities loan facility so as to restore liquidity in the abs market, it was agreed that the u. s. government would shoulder losses up to a certain level. in the case of the asset purchase programme of the bank of england, this is based on the agreement that any losses will be borne by the u. k. government. in the case of the bank of japan, when it decided to embark on a program of purchasing corporate financing instruments in 2009, the japanese government noted at the monetary policy meeting that it intended to consult with the bank of japan in the context of closing its books at the end of accounting periods if the risks had materialized. the financial trilemma and cooperation among central banks with regard to the stability of the financial system

prerequisite for sustainable growth. important progress has already been observed, though, in the financial sector. bank capital base has been strengthened by the injection of public money. there has also been a progress in reinforcing safety nets. on top of that, the consolidation of financial institutions, especially large ones, is in progress, something which japan has never experienced since the end of the world war ii. i sincerely hope these changes will beef up the profitability and competitiveness of financial institutions, thereby enhancing the efficiency and stability of the financial system as a whole. meanwhile, ongoing corporate restructuring process may exert downward pressure on the economy in the short run. but i believe this should facilitate efficient allocation of resources to high - growth industries, contributing to sustainable growth in the long run. to accelerate such structural change, determined efforts on the part of policy makers are also important. such efforts should include deregulation, tax reform and improvement of accounting and legal systems. the bank of japan, as a central bank, must contribute to ensuring a stable macroeconomic environment through appropriate monetary policy measures, which will form the basis for creative and future - oriented corporate activity. in addition to this, the bank of japan assumes important responsibilities in improving the financial market and payment system infrastructure. the start of real - time gross settlement of fund transfers and government bond transfers from the beginning of next year is one of such efforts. 2. dynamism of the euro area economy when i think about structural reforms in the japanese economy, i always think of the experiences of the euro area economy on this front. today, nobody doubts the importance of structural reform, but it is difficult to achieve a social and political consensus as to the most practical approach. reform is accompanied by pain, and also takes a long time to bear fruit. but once the direction is set, reform calls for further reform, thereby generating autonomous momentum. developments in the euro area economy have considerable implications and are encouraging to us. i realize it may sound too simplistic but the essence of reform lies in market integration. i say this because market integration leads to intensified competition. in the euro area, mergers and acquisitions are a driving force for corporate restructuring and industry reorganization. this increase in m & a, which started from around 1997, was no doubt sparked by the introduction of the euro. in addition, firms are being forced to change their management strategy so that they can survive amid global competition and keep up with technological innovation. indeed, firms are increasingly aware