whether financial institutions would continue their war of attrition under their existing business models or would expand their business frontiers by unearthing new financing needs. just as in human beings, for whom chronic syndromes demand fundamental changes in lifestyles, financial institutions must be prepared to fundamentally change their business models in order to extricate themselves from a structural lack of profitability. schumpeter, joseph alois. 1926. theorie der wirtschaftlichen entwicklung : eine untersuchung uber unternehmergewinn, kapital, kredit, zins und den konjunkturzyklus, 2nd revised ed. leipzig : duncker & humblot. ( the theory of economic development, translated by redvers opie, transaction publishers : new brunswick, new jersey, 1983. ) laeven, luc & levine, ross & michalopoulos, stelios. 2015. “ financial innovation and endogenous growth, ” journal of financial intermediation, elsevier, vol. 24 ( 1 ), pages 1 – 24. oecd. 2011. “ new sources of growth : intangible assets. ” morikawa, masayuki. 2015. “ financial constraints on intangible investments : evidence from japanese firms, ” in ahmed bounfour and tsutomu miyagawa eds. intangibles, market failure and innovation performance, springer, ch. 6, pp. 139 – 155. bis central bankers ’ speeches the bank of japan has implemented a few measures that would encourage financial institutions to implement their essential reforms. one is to adjust the way in which the bank injects liquidity into the financial system – for example, the fund - provisioning measure to support strengthening the foundations for economic growth, and purchases of etfs composed of stocks issued by firms that are proactively investing in physical and human capital. these measures are expected to play catalytic roles in enhancing the financial intermediation functions of financial institutions and capital markets, which would foster productivity increases and ultimately lead to improvements in the potential rate of growth. another set of measures is designed to enhance the function of financial institutions to efficiently allocate resources. the bank of japan is actively providing financial institutions with information and know - how through seminars, etc., so that they can enhance the value of their financial intermediation through, for example, support for startup businesses, business matching, re

of financial stability and the policy implications of newly emerging challenges from three perspectives : unconventional monetary policy, macroprudence, and low profitability of financial institutions. financial crisis and growth inflection to begin with, let me go back to the 1990s and explain my experiences during the bursting of the bubble economy in japan. as i touched on at the beginning, both sweden and japan experienced financial bubbles. nevertheless, the subsequent paths of the two countries were quite different ( chart 1 ). in sweden after the crisis in the early 1990s, capital was quickly injected into the banking system and the stability of the financial system was restored. in addition, the swedish krona was floated, and the riksbank was able to ease monetary policy. with the tailwind of the depreciating krona contributing, the swedish economy began to recover as early as 1993. furthermore, following sweden ’ s accession to the european union in 1995, factors such as the growth of the it industry benefitting from the increases in inbound investment contributed bis central bankers ’ speeches to productivity growth. in fact, sweden ’ s potential growth actually increased after the bursting of the bubble. in contrast, japan only managed to inject capital into financial institutions on a meaningful scale after the “ dark november ” in 1997, when it experienced a series of failures of large financial institutions. 1 that was nearly eight years after the bubble had burst. during those years, financial institutions ’ behavior, such as evergreening their loans to practically failed businesses by extending additional loans, resulted in a further buildup of impaired assets, which made it all the more difficult to cleanse financial institutions ’ balance sheets of problem loans, and which distorted the allocation of resources. the layering of these multiple factors pushed the japanese economy into deflation, and concurrently, productivity growth declined. 2 furthermore, this period overlapped with rapid changes in demography, resulting from a declining working - age population against the backdrop of a low birth rate and aging. the confluence of the two currents – financial sector problems and demographic changes – significantly pulled down japan ’ s potential growth rate ( chart 2 ). that in turn exacerbated over - leveraging in the corporate sector and discouraged corporate investment. from a macroeconomic perspective, lower investment depressed productivity growth, which again negatively impacted potential growth. there was a vicious cycle : over - leveraging in the corporate sector led to the decline in the potential growth rate, which in turn exacerbated the difficulty of resolving non -