( pigou ( 1926 ), christiano and fujiwara ( 2006 ) ). aside from the well - maintained price stability, we can mention factors which might work to delay the timing of tightening of monetary policy as follows : the need for international cooperation at the time of the october crash in 1987 with japan as the largest creditor country as well as tax reforms to introduce the consumption tax in 1988 - 89, in addition to the apprehension of the consequences of the rapid yen appreciation on economic activity. ikeo ( 2006 ) put emphasis on the absence of corporate governance due to the joy ride of “ developmentalism ” and the eroded role of the “ main bank ” as delegated monitor in explaining the excessive credit provision by banks. on the cause of lower potential growth in the 1990s, prescott and hayashi ( 2002 ) focused on the importance of the negative supply shock arising from the shortening of labor hours. yet, this did not imply that “ nominal income targeting ” by using the monetary base as an operating instrument was adopted. the “ vector - error - corrections model ” confirmed the breakdown of the long - run cointegrating relation between money supply and income or prices, although the cointegration linkage still exists with respect to the total fundraising by moneyholders and economic activity ( bank of japan ( 2003 ) ). miyao ( 2005 ) also confirmed the disappearance of the predictive content of m2 + cds in the late 1990s by carrying out cointegration analysis. yet the unstable demand for money as well as the zero bound on policy interest rate do not imply that money has no role to play in the transmission mechanism of monetary policy. citing the experience of japan ’ s quantitative easing policy, governor mervyn king ( 2002 ) questioned whether the excess supply of money under the zero interest rate policy would lead to the potency or impotency of monetary policy. 9 at the panel discussion of the jackson hall conference in 2005, i gave my answer to this question : under the quantitative easing policy the extent of the zero interest rate was widened to cover the oneyear maturity in tandem with the increasing amount of reserve target from 5 trillion yen to 30 - 35 trillion yen. i argued that ample provision of liquidity contributed to preventing the economy from falling into a deflationary spiral. besides, the additional injection of liquidity into the market complemented the commitment about the future path of the policy interest rate, thereby strengthening the “ policy duration effect ”. furthermore, at the satiation level of money

##connected financial firms. currently, these firms appear well positioned to absorb a shock. for instance, figure 2 shows the ratio of common equity tier 1 capital to risk - weighted assets — a standard regulatory capital measure — for three groups of banks. this ratio has been increasing for all types of banks lately and, for the largest banks, stands at multidecade highs. the largest banks - 4also have strong funding profiles, owing in part to the strength of the regulatory regime for these banks. despite the overall resilience of the banking sector, some regional banks experienced large deposit outflows amid the failures of three banks last spring. conditions have improved considerably since then : bank profitability remains solid, and deposit flows have stabilized. in addition, as shown in figure 3, most institutions have lowered their reliance on uninsured deposits since the beginning of 2023. we remain attuned to vulnerabilities in this sector. supervisors are working closely with the set of banks that have experienced outsized fair - value losses from higher interest rates and with banks that have high concentrations of commercial real estate loans. we have varying levels of visibility into the leverage and funding vulnerabilities of other financial intermediaries. while there are some areas of apparent vulnerability, there is also evidence of resilience. hedge fund leverage is hard to measure, but available data suggest that these funds ’ leverage is near the high end of its range. large insurers are well capitalized, but they have been increasing their use of liabilities subject to rollover risk at the same time as they have raised the portion of their assets invested in riskier corporate debt instruments. money funds have inherent funding vulnerabilities that regulators have been taking steps to address. reforms adopted by the sec and coming into force this year will improve funds ’ liquidity positions and address the structural first - mover advantages among money fund investors that contributed to some of the runs we have seen in this sector over the years. - 5asset valuations let me turn now to asset valuations. i think it is helpful to consider this potential vulnerability in the context of how a sharp change in valuations could interact with the vulnerabilities i have already discussed. i will start with the classic concern for all of us who lived through the great recession : a large decline in asset prices against the backdrop of a weak economy. for example, house prices are high relative to historical benchmarks, likely owing partly to a limited