period, the convoy system was the norm, in which the primary objective was to prevent exit from the industry by restricting competition among financial institutions. now, financial institutions are required to perform efficient funds intermediation, while strengthening their ability to evaluate profitability and risks as well as improving their risk management capability through competition. systemic risk must be contained. thus, both active risk - taking and financial system stability are necessary. the financial system in japan is still on the path to revitalization, and the risk - taking capability of financial institutions is not yet sufficient. financial institutions need to accelerate their efforts by april 2005 when the blanket guarantee of deposit insurance will be completely lifted. in light of the various demands of the new era, the bank aims to enhance prudential policy as well as the conduct of on - site examinations and off - site monitoring. the third issue is how to improve the financial market. in the new economy in which companies compete in creating value added, it is necessary to understand the needs of the time and the evaluation of one's own business model from the " signals " transmitted by various markets. the market mechanism serves as an " antenna " and enforces discipline, which is indispensable for the japanese economy's future prosperity. looking at this from a financial standpoint, financial institutions need to strengthen their risk - taking ability. at the same time, we require a framework in which the optimum allocation of resources is realized through the markets. the bank aims to contribute actively to this end. since lending by financial institutions is an overwhelming part of the financial intermediation channel, it is both pragmatic and effective to start developing new credit markets, including a market for asset securitization. accordingly, the bank has already begun to implement concrete measures along this line.

_ 041202. html. that ', sydney, december – available at of production. these surprises tended to push output up and prices down. this has been, we have to admit, a very benign environment in which to operate monetary policy. it may not always be this way in future. inflation - targeting central banks will certainly find challenges if adverse supply disturbances occur, but this is also true of any other monetary policy model we could think of. i imagine that inflation targeters, if faced with a rise in inflation above target due to supply shocks, will focus on gradually bringing inflation down again. if inflation expectations are well anchored near the target rate, as they appear to be in most countries, there is no reason to believe this will be unduly difficult, and in fact there would in such circumstances be flexibility to take some time to achieve convergence back to the target, which could help adjustment on the real side of the economy significantly. the third issue for the future is how, if at all, to respond to major movements in asset prices. this is the most difficult problem to tackle, both conceptually and in practice. most people agree that asset price inflation per se should not be an objective of monetary policy. most people also agree that, to the extent that asset price movements have implications for the course of the economy over the standard forecasting horizon of a couple of years – through wealth effects, for example – those effects should be allowed for in the setting of monetary policy. this is really just saying that in searching for the optimal policy setting to achieve the inflation target over a two - year horizon, all the relevant information should be taken into account. we can all sign up to that. but there is a lot more to asset price dynamics than that. these events typically have a lower frequency than the business cycle frequency to which our normal policy practices are attuned. they build up over a number of years. furthermore, asset price movements and their effects are often asymmetric. when asset prices are rising, they can easily co - exist with low cpi inflation. but because this is often associated with a build up in debt, the ensuing correction in asset prices can cause acute distress to borrowers. this means both that spending behaviour is affected and that there can be a risk of systemic financial instability because distressed borrowers often mean a deterioration in the asset quality of the lenders. this, if it occurs, weakens the economy significantly and can push inflation down sharply.