mobilized, it is important for them to remain humble, fully recognizing the limits of human knowledge. d. examining the financial environment the fourth point i would like to make is that assessment of monetary policy effects requires examination of the overall financial environment, including not only the level of nominal shortterm interest rates but also developments in various other interest rates, the state of financial markets'functioning, and the lending stance of financial institutions. central banks use a short - term interest rate, usually an overnight rate, as their policy interest rate. in japan, the policy interest rate is the uncollateralized overnight call rate, and the target level is currently set at around 0. 5 percent. however, it is not only short - term interest rates that influence the spending behavior of firms and households, but also ones with longer maturities – in other words, all the interest rates that form the yield curve. it is also important to assess the level of interest rates in real terms, taking into account expected inflation rates. furthermore, it should be borne in mind that firms, when borrowing from banks or from the market by issuing bonds, have to pay higher interest rates than risk - free borrowers such as the government, with spreads added onto the benchmark rates in accordance with their creditworthiness. in some cases, financial institutions may refuse to lend even if a borrower is willing to pay a higher interest rate. given the facts i have described, when assessing the effects of monetary policy and making policy decisions, it is vital to examine thoroughly not only the appropriate level of the policy interest rate but also the overall financial environment, which is suggested by the shape of the yield curve, the relationship between the level of the policy interest rate and the potential economic growth rate as well as the expected inflation rate, various credit spreads that are added onto benchmark interest rates, and the lending stance of financial institutions. conclusion i have explained the basic points that are important for the conduct of monetary policy. in closing, i would like to touch upon a few issues related to the organization and behavior of central banks. the first issue relates to the basis for central banks'independence – in other words, why they alone are entitled to conduct monetary policy. i explained earlier that a central bank takes policy action to ensure sustainable price stability in the medium to long term. such action, however, may not be popular in the short term. what then justifies such action by a central bank? my answer is that accurate research and

, i have described the bank's thinking regarding the conduct of monetary policy in terms of interest rate policy. now, let me remind you of an important fact : proper functioning of financial markets is a prerequisite for monetary policy to be effective. it is therefore vital to ensure the stability of japanese financial markets when global financial markets remain volatile. fortunately, japanese financial markets have so far been stable unlike their u. s. and european counterparts. mainly this is because japanese financial institutions have had only limited exposure to subprime - related products, but i believe that a considerable role was also played by the fact that the bank, based on its past experience of financial crises, had already established a framework for flexibly providing liquidity. as you know, since last summer central banks in north america and europe have introduced various tools for liquidity provision to address elevated pressures in short - term funding markets. for example, the fed has extended the maximum maturity of its funds - supplying operations to one month, from two weeks. the bank employs funds - supplying tools with a variety of maturities – some of which have a maximum maturity of one year – and this enables the bank to provide funds with the appropriate maturity. in march this year, the fed introduced a credit facility that allows securities companies to borrow funds. the bank has included securities companies as counterparties since 2001, when it introduced a complementary lending facility. as for collateral, central banks in north america and europe have recently expanded the range of eligible collateral they accept, while the bank has long accepted a broad range of assets as eligible collateral. moreover, the bank has a " pooled collateral " system, which allows counterparties to change their collateral in a flexible manner when necessary. needless to say, excessive use of such supportive measures may hamper the proper functioning of financial markets, which should operate autonomously, and therefore it is important to maintain a good balance between offering supportive measures and leaving things to the autonomous functioning of the market. what we have learned from japan's experience in 1997 and subsequent years, however, is that once strains occur in borrowing from the market, smooth borrowing and lending become difficult, and problems cannot be easily resolved. in order to maintain a financial environment in which monetary policy accommodation effects derived from the present low interest rates are fully realized, the bank will continue to carefully monitor market developments and to ensure the stability of the money market. it will also carefully assess the future outlook for economic activity and prices, closely considering the