the world economy, posing new challenges for japan's economy. external imbalances and trade friction led to the currency re - alignment of the plaza accord in 1985. this put deflationary pressures on japan's economy, while making traditional segments of our economy obsolete. in order to fend off the deflationary forces, japan made full use of macro - economic policies. the government stepped up fiscal spending to boost domestic demand. the bank of japan ( boj ) eased monetary policy for an extended period of time, consequently fuelling the rapid boom in the economy. together with various structural factors, these expansionary policies spawned distortions in japan's economy. to name just a few examples, we saw a nation - wide surge in resort area development at the expense of our green environment. we embarked on the re - development of metropolitan tokyo to make it an international financial hub, but with little coherent strategy in hindsight. fiscal profligacy by the government, which i referred to just a few seconds ago, resulted in the building of local roads and ports barely used by travelers - a classical faux pas of pork - barrel politics. such economic frenzy generated irrational growth expectations, further prompting excessive investment in both real and financial assets. as you know, the upshot of this euphoria was the asset bubbles and their subsequent bursting. all these episodes point to one thing : despite the substantial changes in its external circumstances, japan was not able to depart from the development model it cherished during the economic catch - up period. we had many discussions about how to reform our system in the face of the headwind against japan's economy after the plaza accord, but we did not follow our words with action. put differently, it was a reform by word, not in deed. after the collapse of the economic bubbles in the early 1990s, we finally learned that every boom must evaporate some time. an aging population and declining birth rate also forced us to acknowledge the need to revamp our modus operandi so that we could remain viable in global competition. this perception shift marked the beginning of the long adjustment phase from the mid - 1990s - a harrowing decade when japan's private and public sectors tried to reinvent themselves. the corporate sector tried hard to get rid of the negative legacies of the bubble era - that is, excesses in production capacity, labor, and debt. although hard hit by falling employment and wages, the household sector endured relatively well during this

##closures and we will soon launch a dialogue to find solution in favor of the macedonian economy. hence, there should not be any doubt that in future the national bank will “ hear the voice ” of the banks. but, also, it should be clear that the national bank does not discuss the monetary policy measures with anybody, not even the banks, before it makes a decision to adopt them. they are at the absolute discretion of the national bank. this is a worldwide practice. neither the european central bank, nor the czech central bank, nor any other central bank throughout the world consults or informs the commercial banks on the monetary policy measures before it makes the decision. distinguished ladies and gentlemen, i dedicated most of my last year ’ s speech arguing that the stable denar exchange rate is still the best solution for the macedonian economy. in the public debate concerning this issue last year, on many occasions, i presented additional arguments that underpin my view. on this occasion i will discuss the two theses recently presented by the advocates of floating denar exchange rate. the first thesis is that the floating exchange rate will ensure more relaxed monetary policy, and accordingly, higher economic growth. the second thesis is that the denar exchange rate is not realistic, i. e. it is overrated. yet, so far, i still have not heard any explanation of how would the floating exchange rate relax the monetary policy, nor arguments supporting the view that the denar is overrated. considering the first thesis, note that the exchange rate regime does not determine whether the monetary policy will be restrictive or relaxed. you could have floating rate and restrictive monetary policy, or fixed exchange rate and relaxed monetary policy. what is important for the monetary policy is whether there are imbalances in the economy or not. just because of the absence of imbalances in the macedonian economy, as i elaborated at the beginning, we can afford relaxed monetary policy. conversely, due to the nature of our economy, the floating exchange rate would fuel uncertainty and create imbalances and high inflation, the alleviation of which would require extremely restrictive monetary policy. concerning the overrating of denar exchange rate, i have presented, on several occasions, data on denar real effective exchange rate that indicate quite the opposite. on this occasion i will only refer to the market. it is the market that determines whether a commodity is overrated or not. since the beginning of august last year, the national bank has only once sold