masaaki shirakawa : some thoughts on incentives at micro - and macrolevel for crisis prevention remarks by mr masaaki shirakawa, governor of the bank of japan, at the eighth bank for international settlements, annual conference, basel, 26 june 2009. * * * introduction the current financial and economic crisis has posed wide - ranging challenges to policymakers and academics. already, various proposals have been made for the reform of financial supervision and regulation. the traditional approach in this area is based on a microprudential perspective. from that perspective, financial system stability will be achieved by assembling sound financial institutions with adequate capital and liquidity positions as well as proper risk management. that approach certainly plays an important role, but i am still uncertain whether the cumulative efforts in that approach will eventually ensure the financial system being shielded from a future crisis. in fact, the financial regulatory and supervisory framework was reformulated from the microprudential viewpoints every time a financial crisis occurred. in that respect, i will raise two questions. the first question is : “ has legally effective netting contributed to reducing the overall degree of risk in the financial system? ” it is true that netting is effective in reducing counterparty risk. however, once the risk is reduced to a certain degree, a financial institution tends to take further risk. as a result, it is still not certain whether netting contributes to reducing aggregate risk. the second question is : “ will a financial institution take a different business strategy not to expand its leverage when facing again a benign economic condition, comprised of low inflation, high growth, and low interest rates? ” some financial institutions will surely take a conservative strategy, considering the lessons from the current crisis. but, most financial institutions will find it hard to resist pressures from equity holders to raise the returns on equity under severe competition. those examples seem to show the need for analyzing the incentives of financial institutions from the viewpoints of the macro - as well as micro - level. incentives for a financial institution are underpinned not only by the framework for financial regulation and supervision at a micro level but also importantly by the financial and economic environment at a macro level. at a micro level, “ too big to fail ” is the single most important issue. at a macro level, monetary policy is important. today, i will mainly focus on monetary policy responses to a bubble. then, i will briefly touch upon some issues on supervision and regulation. importance of risk - taking channel before the

the household sector, firmness in housing investment and car purchases has become pronounced partly due to the effects of the decline in long - term interest rates. as for the outlook, the recovery trend in the u. s. economy is likely to gradually strengthen in the latter half of 2013, as the effects of expiration of tax cuts wane and uncertainties diminish in regard to fiscal spending cuts and the debt ceiling problem. economic activity in the euro area remains weak. from the latter half of 2013, however, economic activity is likely to gradually recover particularly in core countries such as germany and france. this is because ( 1 ) disturbances in financial markets have been diminishing ; ( 2 ) the degree of fiscal austerity, while continuing, has eased somewhat ; and ( 3 ) the competitiveness of peripheral countries ’ exports has begun to recover with the progress in structural reforms, including reductions in labor costs. the chinese economy has been generally picking up since autumn 2012, as the government ’ s expansionary fiscal measures centered primarily on infrastructure investment and monetary easing measures have been producing positive effects. the real gdp growth bis central bankers ’ speeches rate in the january - march quarter of 2013 is expected to recover to the 8. 0 – 9. 0 percent level for the first time in a year. in these circumstances, looking at the outlook for the global economy as a whole, the real gdp growth rate is expected to accelerate moderately from 3. 2 percent in 2012 to 3. 5 percent in 2013 and 4. 1 percent in 2014, according to the latest world economic outlook released by the international monetary fund ( imf ) in january 2013. if the global economy – led by emerging economies – registers growth rates as projected, the rates will be above the historical long - term average. ii. current situation of japan ’ s economy and its prospects, with the key factor of a pick - up in overseas economies a. leveling out of japan ’ s economy japan ’ s economy remained relatively weak during the latter half of 2012, as exports and production decreased significantly due mainly to the deceleration in overseas economies, which in turn adversely affected domestic demand such as business fixed investment in the manufacturing industry. however, recent developments show that the pace of decrease in exports has been moderating and production appears to have stopped decreasing. based on these developments, at the monetary policy meeting ( mpm ) held on february 13 and 14, 2013, the bank of japan revised upward its basic assessment of the