a famous book, lombard street, a treatise on the best central bank practices, providing the first - ever systematic analysis of the roles of a central bank. in the book, he formulated what came to be called bagehot ’ s rule, namely that, to prevent disruption in the financial system in times of crisis, the central bank should act as a lender of last resort, providing unlimited funds at punitive rates. 2 the practical application of bagehot ’ s rule has been modified in line with changes in financial market structures, and in the recent global financial crisis, central banks – including the ecb and the bank of japan – aggressively provided funds to the markets as the lender of last resort, thereby preventing a collapse of the financial system. the establishment of the principle of the lender of last resort is of significant importance. the invention of monetary policy the third major innovation i would like to mention, although it may sound somewhat strange, is the “ invention of monetary policy. ” while i will touch later on the issue of how to define monetary policy, for the time being i will use the term in the conventional sense of “ policy that aims at actively influencing the inflation rate or the economic growth rate by controlling the level of short - term interest rates. ” under the gold standard, the quantity of money was constrained by gold holdings and thus the central bank could not influence the price level and economic activity in an active manner. in this sense, central banks had limited room to deploy monetary policy. in fact, monetary policy was not discussed in bagehot ’ s book. monetary policy worthy of the name started only with the transition to a fiat money system. nowadays, appropriate monetary policy conduct has become one of the key tools contributing to macroeconomic stability. the introduction of the concept of central bank independence finally, the fourth innovation has been the idea of central bank independence. while it is only relatively recently that central bank independence has become firmly established in countries around the world, interestingly, in europe active discussions on the enhancement of central bank independence already took place in the wake of world war i. for example, at the 1922 genoa international economic conference, which aimed at restructuring the international economic and financial system in the post - world war i period, in the resolution concerning currency there was a proposal that “ banks, and especially banks of issue, should be free from political pressure. ” 3 it goes without saying that, in subsequent decades, the german public and the bundesbank played

at that time other japanese financial institutions held a large amount of impaired assets. thus, it was judged that an immediate legal liquidation would very likely pose a systemic risk. the bank of japan, therefore, decided to provide yamaichi with an unlimited amount of liquidity to support the orderly closure of its business operations. however, because the disclosure of off - balance - sheet liabilities occurred suddenly and financial markets were unstable, there remained uncertainty about the value of yamaichi ’ s net assets. the premise of bagehot ’ s rule is that the counterparty financial institutions are solvent so that they can submit good - quality collateral. since this was not the case, it was all the more difficult for the bank of japan to decide the proper course. regrettably, at yamaichi ’ s subsequent legal bankruptcy proceedings, it was determined in 2005 that part of the loans by the bank of japan to yamaichi were unrecoverable. however, it should be noted that a situation like the one after the failure of lehman brothers, when real quarterly gdp contracted at a double - digit rate on a year - onyear basis, was avoided. in other words, the measure prevented the worst - case scenario of having japan ’ s financial crisis in the latter half of the 1990s trigger turmoil in the global financial system. the bank of japan implemented other innovative measures apart from the three measures mentioned here. for example, in 2001 the bank of japan introduced the bill purchasing operation conducted at all of its branches, providing longer - term funds to a wider range of counterparties including local financial institutions. this measure is similar to the federal reserve ’ s taf. bis central bankers ’ speeches operation twist to facilitate foreign currency funding the second policy measure pursued by the bank of japan concerns foreign currency liquidity. in the latter half of the 1990s, japanese banks, amid serious concern about their soundness, faced difficulties in raising u. s. dollar funds, especially longer - term ones. in this situation, the bank of japan, as part of its funds - supplying operations, provided longer - term yen funds. japanese banks exchanged these yen funds for dollar funds in the foreign currency swap market with foreign banks as their counterparties. viewed from the foreign banks ’ side, such transactions were dollar loans using yen funds as collateral. therefore, even under the zero interest rate environment, they accepted the trades as long as yen funding rates were negative, despite the deteriorated creditworthiness of japanese banks. however,