ryuzo miyao : a macroprudential perspective in the conduct of monetary policy speech by mr ryuzo miyao, member of the policy board of the bank of japan, at the 2011 asia economic policy conference, san francisco, 30 november 2011. * * * introduction first of all, i would like to thank the organizer of this conference for inviting the bank of japan and allowing me to exchange views among such distinguished panelists and scholars. today i would like to highlight one of the key issues regarding the conduct of monetary policy, namely a macroprudential perspective in monetary policy making. more specifically, i will discuss how to take into account the risk of accumulation of financial imbalances in the conduct of monetary policy, which could help prevent financial bubbles and subsequent crises. i would also like to introduce our experience and summarize what the bank of japan has done so far in this regard. you may find it somewhat premature to talk about how to prevent future crises given that the world is still struggling in the aftermath of the global financial crisis. however, in order for asia to keep playing a leading role in the global economy, the issue must be of great importance, although i should immediately add that we have not observed excessive financial imbalances in the region. looking back at the period after the asian crisis, we have witnessed a series of incidents that can be deemed crises. it appears that the frequency of such incidents is rising and that efforts to deal with one crisis might have provided the seeds for a subsequent crisis. in the coming years, asia will not be allowed the luxury of simply being pleased with the situation. i. the essence of the global financial crisis as background, let me briefly review the essence of the global financial crisis. although a variety of economic and financial factors are involved, the essence of the global financial crisis is the formation and bursting of the credit bubble. in forming the bubble, the household sector in the united states expanded borrowing and consumption along with the boom in housing prices. on the financial front, new types of transactions such as securitized products and derivatives prevailed, and leverage also increased significantly. such excess in real economic activity, asset prices, and financial markets had a shared influence among each of these components, and this led to further excess that spread beyond national borders, resulting in the global credit bubble. balance - sheet adjustment has continued to constrain recovery in many countries, which is typical after the bursting of a large - scale credit bubble.

condition is attached to the commitment, that is to say, the bank will continue the virtually zero interest rate policy “ on condition that no problem is identified in examining risk factors, including the accumulation of financial imbalances ”. in practice, however, detecting the accumulation of financial imbalances is not an easy task. in searching for early warning indicators for financial crises, vigorous research has been done globally at various institutions such as the imf and bis as well as central banks, including us. the results of those efforts have shown that, for the purpose of detecting financial crises, it is useful to assess the degree of financial excesses by monitoring indicators such as asset prices, credit aggregate, total investment, and residential bis central bankers ’ speeches investment, most typically their deviation from a trend. the bank has established a framework to regularly check such indicators in the conduct of monetary policy. while developing analytical tools devoted to the conduct of monetary policy, the bank has also been making efforts to better analyze and assess risks across the entire financial system. specifically, it has produced diversified stress scenarios as part of macro stress testing and developed the new financial macroeconometric model to analyze the feedback process in which stress exerted on economic conditions and asset prices spreads to the real economy through the behavioral changes of financial institutions. the bank has also been developing indicators useful in analyzing excessive credit expansion and the financial sector ’ s risk - taking, as well as in detecting signs of instability in the financial system. these new tools and assessments were incorporated in our financial system report published in october, which is available at our web site. the bank also attempts to further promote concerted efforts between these assessments of financial system stability and monetary policy making. the recent economic outlook released in october and subsequent policy judgments reflect these new developments from macroprudential perspectives. closing remarks let me conclude. i have described the importance of a macroprudential perspective in the conduct of monetary policy and the bank of japan has been making certain efforts in this regard. however, i should admit that these are only partially completed and we should keep up our endeavor. in the aftermath of the global crisis, each country has implemented various policy reforms based on similar grounds. i would like to finish by expressing my sincere hope that a policy framework to prevent future crises will be further established worldwide in the coming period, through sharing experiences at various gatherings such as this conference. thank you very much. bis central bankers ’ speeches