policies and systems, we will need to maintain a timely watch on changes in the international financial markets and adopt a flexible stance when responding so as to prevent any excessive volatilities of capital flows or exchange rates. the process of sequenced normalization will meanwhile be sequenced not only across countries, but also across the various different policy tools introduced in each country second, the process of normalization will entail rises in interest rates, and we can therefore not rule out the possibility of facing the risk of a global interest rate increase. we need to also pay attention to the increased burdens on the financial sector for maintaining soundness, such as the demand for raising of additional capital due to potential valuation losses on bond holdings. from a historical perspective, the u. s. federal reserve ’ s interest rate hikes in the mid - 1990s caused long - term treasury bond rates to rise significantly, and due to the consequent drastic capital outflows latin american countries experienced a series of financial crises. in contrast, the fed ’ s interest rate hikes in the late - 1990s did not trigger any increase in long - term bond rates, and in the mid - 2000s, despite rate hikes by the fed longterm yields on government bonds even fell, triggering a phenomenon referred to as “ greenspan ’ s conundrum ”. bearing in mind that the results of a policy rate hike may therefore vary significantly, we must keep a close eye on market changes. we should note that while the economic crises in many countries during periods of interest rate increases over the past few decades can be traced in part to common phenomena such as rises in funding costs and declines in asset prices, they have also been attributable to large extents to financial institutions ’ adverse selection. and this is because the adverse side effects and economic vulnerabilities built up through the widespread pursuit of high - risk, high - return investment during periods of low interest rates become evident once rates begin to rise. third, we should work internally to identify the effects of our various policy instruments, and make preparations for dealing with any changes in external conditions promptly while at the same time devoting active efforts to eliciting global cooperation. the ratios of exports to gdp stand at only around 10 and 13 percent respectively in the u. s. and japan, but in korea reaches nearly 50 percent. we should note that stability in the international economic environment achieved through global cooperation is all the more important for the korean economy, whose

package, the korean economy is expected to move onto a moderate recovery track in the near future, though there may be some impact from the damage inflicted by the recent typhoon. the problems we confront, though, are by no means simple. above all else, we have the issue of the high social costs exemplified by the recent confrontation between labor unions and employers and the prevalence of actions placing the interests of vested interest groups above those of society as a whole. the timely resolution of this conundrum is crucial to the long - term health and viability of the country ’ s economy. we also have to tackle the potential threats to financial stability including the mounting number of koreans on credit blacklists, swelling overdue loans in the household sector and the frail management status of certain financial institutions. one of the characteristics of korean society inherited from a history of adversity is that when people share the perception that the country faces a crisis, they unite as one in enduring whatever hardship it takes to overcome it. this was the wellspring from which korea drew the strength to surmount the currency crisis. and helped by these social dynamics, koreans will, i am confident, deal skillfully with the present challenges. there are already signs that a social consensus has been reached on the need to overcome the problems that i have mentioned for the good of the korean economy. the government is now also directing its attention toward curing the evil of spiralling social costs. 2. monetary policy in the light of the shifting economic environment, the bank of korea has conducted monetary policy so as to support the economic recovery while smoothing out the internal and external disequilibria. early this year, because of the current account moving into the red and the upward price pressures brought about by the steep run - up of international oil prices, we had difficulties in making use of the interest rate policy lever to deal with the downturn in economic activities. we therefore left our target rate, the overnight call rate, on hold. but the current account shifted into surplus and price movements settled down once international oil prices showed downward stability following the early end of the war in iraq. for this year as a whole, too, our forecasts pointed to core inflation being held stable within its target range at the 3 percent level and to the current account maintaining its underlying surplus trend since the 1997 currency crisis. under these circumstances, the bank of korea moved to revive business and consumer confidence. in may and again in july, it reduced its overnight call rate