likely to experience a full - fledged increase in the number of full - time workers. a more troublesome problem is that wage - setting practices have changed during the prolonged period of deflation. because of low labor mobility due to relatively widespread lifetime employment, wages of regular employees in japan tend to reflect labor market conditions only insufficiently, at least in the short term. therefore, some kind of mechanism, a “ visible hand, ” is necessary for wages to rise. prior to the period of deflation, the so - called bis central bankers ’ speeches spring offensive of the practice of simultaneous wage negotiations between management and labor at major firms in spring served as such a mechanism for negotiating wage increases. however, as deflation continued, this mechanism stopped working effectively. that is, firms needed to cut wages in order to reduce costs against the background of falling prices, while it was rational for workers to accept a decline in wages in exchange for job guarantees. as a result, in the past decade or so, the practice of raising base wages through the spring offensive had more or less disappeared. this spring, however, has seen increases in base wages and / or bonuses not only among large firms but also among small and medium enterprises, partly reflecting calls by the government. for wages to increase at an appropriate pace in the future, it is necessary to have some kind of coordination mechanism to bring about wage increases. in such a mechanism, the bank of japan ’ s price stability target can serve as a benchmark for firms in their wage setting. that is, once the bank has succeeded in firmly anchoring inflation expectations at 2 percent, this could provide the basis on which wage negotiations between management and labor are conducted. firms and households can then base their economic decisions firmly on the expectation that prices will rise at a rate of around 2 percent. thus, creating an appropriate wage - setting mechanism plays an important part in anchoring inflation expectations at 2 percent. concluding remarks i have so far talked about the effects of balance sheet adjustments and deflation on the labor market, but there is one topic i have yet to touch on. this is an issue that concerns the supply of labor, namely, demographic changes. reflecting the aging of japan ’ s population, the labor force participation rate has been on a downtrend, and serious labor shortages are likely to emerge in the future. the downtrend in the labor force participation rate is due to japan ’ s demographic composition and therefore does not come as a surprise. however,

masaaki shirakawa : what is so special about financial innovation? keynote address by mr masaaki shirakawa, governor of the bank of japan, at the netherlands bank conference in honour of mr nout wellink on “ welfare effects of financial innovation ” ( via videoconference ), amsterdam, 11 november 2011. * i. * * introduction today i am honored to have the opportunity to appear as the keynote speaker of this conference marking the retirement of nout wellink. i wish i could participate physically, but thanks to innovation, which is the very topic of today ’ s conference, i am now able to join you through videoconference from tokyo, about 10, 000 kilometers away from amsterdam. there is, of course no need for me to remind you of nout ’ s distinguished career, at the netherlands bank, the basel committee and the bank for international settlements, to name just a few. i would just like to thank him for his contributions on all the occasions i had the pleasure of working with him, and for his friendship outside the meeting rooms. central bankers, or policymakers more generally, are quite fond of innovation. it is the catalyst for growth. innovation is the key to increasing productivity, and without it, our economies can only grow linearly with the increase in input factors. innovation is now all the more important, especially in the developed economies, because – as our population ages and the labor force stops growing rapidly – productivity growth underpinned by innovation is the only way for us to realize growth in the years ahead. in this sense, innovation is something we regard as inherently positive. nevertheless, we are gathered here to examine the welfare effects of financial innovation. the fact that we can usefully discuss such things implies that not all developments described as financial innovation might be welfare enhancing. why is it that we have to persuade other people – and perhaps even ourselves – of the merits of innovation, when we add the word “ financial ” in front of “ innovation ”? today, i would like to explore why we are sometimes uncomfortable with certain developments in the finance industry that are labeled “ innovation ” by their promoters, and consider policy implications for central banks, with a view to encouraging innovation that would benefit the whole society. fifteen minutes will not be enough to arrive at definitive conclusions, but let me give it a try. ii. drivers of innovations in the financial industry innovation means changing the way business is conducted in order to better serve the clients of the