i am asked, " which is important, knowledge of law or that of economics? " i will come to a very commonsense conclusion : in the work of a central bank, knowledge of economics, of law, and of broader areas is all necessary. i believe that the best part of economics is that it always strictly analyzes human behavior from a viewpoint of incentives. without such analysis, we cannot conduct monetary policy and system design with respect to financial regulation and supervision. however, at the same time, if " policy discussion " based on such economic analysis is not taking due account of the supporting rules or contracts, things will not practically work. in this regard, legal knowledge is quite important. 11 importance of business operations third is the importance of business operations. when the policy of the bank of japan is taken up in the newspapers or on television, in many cases the focus is its " policy, " such as raising or reducing interest rates. however, a consideration of monetary policy requires much more than examination of the target level for the interest rates. the interest rates are induced through banking operations including the sale and purchase of bonds and bills as well as lending to financial institutions. these operations entail consideration of various factors such as from whom and under what conditions the bank will purchase, how much liquidity the bank will provide and for how long, and what kind of scheme should be prepared for settlement. when discussing policies, therefore, understanding of business operations is indispensable. in particular, as was the case in the current crisis, when it becomes necessary to respond in ways that differ from those in normal times, it becomes important to take due consideration of business operations. the difference such a consideration would make in the effects and risks associated with policies are just as i have explained. based on these understandings, the central banks of the major countries are encouraging and supporting examination by legal experts, including legal scholars and practicing lawyers, of legal issues related to financial transactions. the bank serves as the secretariat of the financial law board ( flb ), a japanese organization that examines such legal issues. for information on the purpose, activities, and other details concerning the flb, see its web site. at the same time, we should also recognize that discussing policy without a proper perspective does nothing but harm. the real world is not so simple that gathering all information from the field, namely micro information, will lead to an understanding of the total, and policy cannot be judged from the viewpoint of practical operations

deal with their problems. some of the initial uncertainties involved in setting up and getting these imf adjustment programs going have been resolved. and there are now some encouraging signs of improved confidence and financial stability in the region. among the industrial countries, japan is the one most affected by the spillover effects from its asian trading partners. not only are its trade links with them important, but this external shock comes at a time when the japanese domestic economy is much less buoyant than was anticipated earlier. substantial loan exposure by japanese banks to the asian region has also weakened an already ailing financial sector in that country. but it is important to note that japan has the financial wherewithal to deal with its banking difficulties and that a series of measures to combat these problems and to strengthen the economic recovery have already been taken. additional financial sector and fiscal measures were announced recently. at this stage, the situation in asia is still evolving, and, while prospects have improved, we cannot be sure just how quickly and effectively the south - east asian, korean, and japanese economies will respond to the adjustment measures that have been taken. what about the potential effects of all this on canada? since our trade with asia, including japan, makes up less than 10 per cent of our total exports, the direct effects will be relatively modest. but we must also take into account the indirect effects that work through our other major trading partners and through the prices of some of the products we sell abroad. indeed, the implications of the asian crisis for global economic growth and for primary commodity prices on world markets will probably have a more important impact on canada than the reduction of our exports to asia. the fallout from asia will no doubt have a dampening effect on canadian output growth for the current year. but there are also other, more positive, developments that could well work to mitigate this effect. as i said before, economic performance in our major trading partners in the west, particularly the united states, has been somewhat stronger than anticipated. and even though our short - term interest rates have risen, canadian longer - term rates have been falling, along with their counterparts in the united states and europe, reflecting declining inflation and lower inflation - risk premiums. these longer - term rates are an important element in both business investment decisions and household spending on consumer durables and housing. the bank continues to monitor the situation carefully and to appraise the overall effect of these positive and negative influences on our economy. it is clear, however