current global financial crisis, see " way out of economic and financial crisis : lessons and policy actions, " a speech given by masaaki shirakawa, governor of the bank of japan, at the japan society in new york on thursday, april 23, 2009. products. if these risks are deemed significant then one cannot make a contract, out of fear. in particular, since financial transactions are large in amount and complex in contents, financial transactions will not be carried out in the usual manner if financial institutions are extremely sensitive to the risks. if financial transactions cease, funds necessary for economic activity will not be distributed and economic activity will stagnate further. as such, in the current global financial and economic crisis, confidence, which is the most important element in finance, collapsed during the process of the unwinding of the " excesses. " consequently, the flow of funds stopped and the economy deteriorated further, aggravating the crisis. iii. measures taken by the bank of japan since financial institutions are globally linked through various transactions and economies are also globalized through trade and investments, the crisis that started in the united states spread quickly around the world. although japanese financial institutions did not hold many securitized products, japan's economy was affected significantly because of the global economic and financial mutual relationship. in facing this global crisis, the bank has taken a number of measures. i will now explain the four particularly important ones. 3 reductions in the policy interest rate first, there was a reduction in the interbank interest rate to a low level of 0. 1 percent. with a view to achieving stable economic activity and prices from a longer - term perspective, a central bank raises or reduces the short - term interest rate based on the future assessment. this is what is referred to as monetary policy in the orthodox definition of textbooks. 4 this time, in response to the global economic slowdown, central banks around the world reduced short - term interest rates to a level expressed as the " zero interest rate " ( chart 7 ). provision of ample liquidity second, the bank provided ample liquidity in order to ensure stability in financial markets and financial systems. as mentioned earlier, when mutual confidence in financial institutions declines and concern arises that funding in financial markets might be impaired, this constrains financial institutions from lending to firms and individuals. in such a situation, the bank provided the market with ample liquidity to preempt such concern. it is no surprise that central banks provide funds in

growth potential of japan ’ s economy lies in improving labor productivity in service industries by, for example, offering unique and highvalue - added services. this should be combined with efforts to increase employment by further tapping potential demand and improving labor productivity to create a virtuous cycle. based on considerations such as these, the japanese government has formulated a growth strategy and has actively been taking related measures. recognizing the importance of strengthening japan ’ s growth potential, the bank introduced the fund - provisioning measure to support strengthening the foundations for economic growth in june 2010 and has since enhanced the measure. i will elaborate on this later when i explain the bank ’ s conduct of monetary policy. together with the strenuous efforts undertaken by firms, the support provided by the bank from the financial side, including the provision of funds to areas with growth potential, can help us to overcome deflation. in order to achieve this, it is also necessary for the government to create the right environment. with this in mind, the bank will continue exerting itself in its role together with firms, financial institutions, and the government. c. efforts to ensure fiscal sustainability alongside strengthening japan ’ s growth potential, a key issue that needs to be addressed is ensuring the sustainability of the public finances. japan ’ s government debt outstanding exceeds 200 percent of nominal gdp, which is the highest level among advanced economies. nevertheless, yields on government bonds remain stable at low levels. this is often explained by the fact that japan has a current account surplus and a large portion of government bonds are held by domestic investors. it should be noted, however, that, as the european debt crisis shows, once market participants start doubting the government ’ s determination to work toward fiscal sustainability, the situation could change in a nonlinear fashion. given that social security spending will continue to exert upward pressure on fiscal expenditure, it is necessary to push ahead with structural reform of the public finances in terms of both expenditure and revenue while the public still has confidence in fiscal discipline. iv. monetary policy a. the conduct of monetary policy i would now like to turn to the bank ’ s conduct of monetary policy. the bank recognizes that japan ’ s economy is faced with the extremely important challenge of emerging from deflation and returning to a sustainable growth path with price stability. based on this recognition, the bank has been consistently making contributions as the central bank, using a three - pronged approach consisting of ( 1 ) pursuing powerful monetary easing under the comprehensive monetary easing policy