might be affected in the future. given the relatively high level of debt, it is important to be well prepared for the potential risk that failure of individual financial institutions might become systemic and have a significant impact on economic activity. based on japan's experience, i would like to emphasize the following three points. ( 1 ) importance of establishing financial safety nets the first point is the importance of building institutional frameworks that contribute to the stability of the financial system, namely, financial safety nets. in order to prevent failure of individual financial institutions from spreading through the financial system, it is necessary to have a quick and smooth resolution framework. in addition, various prudential schemes are needed for maintaining the soundness and confidence of the entire financial system. in japan, a deposit insurance system was established at a relatively early stage in 1971. however, other key financial safety nets were introduced belatedly after japan faced and dealt with the financial crisis caused by the burst of the bubble. the main examples of these safety nets included the resolution mechanism for financial institutions, the mandatory disclosure scheme on nonperforming loans, accounting standards for the adequate write - off of nonperforming loans, and the prompt corrective action framework ( slide 14 ). in the case of japan, the government established these safety nets while dealing with the failure of financial institutions and the financial crisis. as a result, it took a long time to restore financial stability. in particular, there was no legal framework for injecting public funds into financial institutions. moreover, in the beginning of the crisis, the general public was strongly opposed to the idea of injecting public funds. therefore, business conditions of financial institutions deteriorated further until the injection was realized. in china, a deposit insurance system was established in 2015. now, it is important to develop financial safety nets further while the financial system is sound. in this regard, china introduced measures this year to encourage financial institutions to increase capital through the issuance of perpetual bonds. this approach is in line with actions taken by other financial authorities around the world. at present, based on the experience of the global financial crisis, a common understanding among the authorities is that financial institutions should secure adequate capital on their own, relative to their size, rather than rely on public funds in the case of financial stress. in order to ensure the effectiveness of capital reinforcement, regardless of the source of funds, financial institutions need to monitor their own financial conditions carefully and, if necessary, raise capital proactively

##bank market need to be transmitted effectively through various interest rates, including the government bond yields. to achieve this, it is necessary not only to liberalize various interest rates, but also to improve the functioning of the financial markets and thereby facilitate arbitrage transactions across markets. in the case of japan, the boj has made various efforts to develop financial markets. our efforts focused not only on short - term money markets but also on bond markets and derivatives markets including futures ( slide 10 ). in china today, various financial markets are also being developed. in light of our experience, i would like to point out some issues that are particularly important going forward. first of all, increasing the diversity of market participants is critical. liquidity of financial markets will improve when there are more transactions among diverse market participants with different business models, asset and liability structures, and views on the future course of interest rates. in addition to developing domestic institutional investors, encouraging entry by foreign financial institutions has great significance. in japan, the entry of foreign financial institutions into bond markets has increased since the 1980s, and they have contributed to the smooth and flexible formation of both short - and long - term interest rates. moreover, communication and cooperation between the central bank and market participants is vital. it is necessary to take into account the needs and burdens of market participants when establishing transaction rules, statistics, and payment systems. the boj has engaged in frank discussions with market participants through regular meetings and forums with specific themes. in this regard, it is very encouraging to see that such initiatives are already being taken in china. for example, financial markets have become increasingly open to foreign investors, especially since last year. liquidity of financial markets will increase significantly as participation by foreign financial institutions increases. furthermore, the relevant authorities, including the pbc, have started to make efforts to increase market liquidity, such as allowing more banks to trade bonds via stock exchanges. these efforts are expected to develop a market environment with enhanced market mechanisms. ii. financial system : preparation for an orderly exit of insolvent banks from the market now, i would like to move on to the next theme, the financial system. financial liberalization has a significant impact on the business environment and behavior of financial institutions. as the liberalization proceeded in japan in the 1980s, financial institutions became concerned about the decline in profitability and the competition among them became fierce. as a result, they started lending aggressively, which eventually led to the creation of the asset -