masaaki shirakawa : reviewing the economies of switzerland and japan remarks by mr masaaki shirakawa, governor of the bank of japan, at the 30th anniversary luncheon of the swiss chamber of commerce and industry in japan ( sccij ), tokyo, 10 october 2012. * * * before i begin, i would like to thank chairman thomas jordan for his detailed and informative presentation on the state of the swiss economy and the issues faced by the swiss national bank. i believe that everybody in this room would agree that we have learned a great deal. in the next five minutes, instead of commenting directly on what thomas has just explained, let me offer you some thoughts that come to my mind when i look at the swiss and japanese economies. switzerland and japan are very different. switzerland is land - locked. it is in effect an island in the sea of the european union, where about 60 percent of its exports are headed and 80 percent of its imports derive ( chart 1 ). japan is far more populous. the japanese economy is about nine times as large as the swiss economy. nevertheless, there are similarities. for example, both countries enjoy, or even suffer from, very stable prices. the average annual inflation, measured by headline cpi, over the twenty years from 1992 to 2011 was 1. 1 percent in switzerland and 0. 1 percent in japan ( chart 2 ). in august this year, the year - on - year change was – 0. 5 percent in switzerland and – 0. 4 percent in japan. consequently, interest rates are also low ( chart 3 ). in recent weeks, the yield on ten - year government bonds has been hovering around 0. 5 percent in switzerland, slightly below japan ’ s 0. 7 to 0. 8 percent range. both currencies, as thomas has explained, are at historically elevated levels. in this regard, the news media and the public are usually focused on a specific traded exchange rate between currencies, such as the swiss franc to the euro or the yen to the u. s. dollar. these rates are important, but there are additional indicators for exchange rates. in order to understand what would happen in an economy when exchange rates fluctuate, exchange rates for all the trading partners must first be taken into account. from this viewpoint, we must look at the nominal effective exchange rate, which is a trade - weighted index of exchange rates. in the case of switzerland and japan, compared with january

actions of market participants. when i say “ the lessons ”, they are not such dramatic ones. it can be as simple as “ when benign financial and economic conditions continue for a long time, there is a possibility that various excesses will accumulate, resulting in extremely large economic fluctuations. ” of course, it is easy to anticipate that there will be difficulties in utilizing the lessons, or “ common sense ”, in actual policy responses. however, whether such “ common sense ” is shared broadly or not could make a big difference in the economic outcome. recently, the idea of macro - prudence has been discussed as a methodology for crisis prevention. while specific system designing is a future challenge, i believe that the sharing of “ common sense ” between the policy authorities and the market participants could be a starting point for the discussion of establishing a macro - prudence system. by occasionally reminding ourselves of the lessons from the financial crises and sharing the lessons as “ common sense ” with many people, we will ensure the flexibility of policy management and minimize the possibility of a future financial crisis. the bank of japan's measures to facilitate corporate financing in closing, turning to a different issue, i will briefly touch on the specific steps the bank has taken since last year to facilitate corporate financing. in response to the substantial deterioration in corporate financing since the autumn of last year, the bank has been taking a series of steps such as outright purchases of commercial paper and corporate bonds and special funds - supplying operations to facilitate corporate financing. while those measures were extraordinary as a central bank's policy measures, we judged it appropriate as temporary measures in light of the severe economic and financial conditions. as for how to treat those temporary measures, the bank will decide by thoroughly examining the state of corporate financing and financial markets and considering the degree of their improvements. in doing so, a risk that the prolonged usage of temporary measures might impair an autonomous recovery in market functioning and result in a distortion of resource allocation, will also be taken into account. if the bank can share such a risk as “ common sense ” with market participants, the bank can conduct its policies in a timely manner. in addition, the incentives of the market participants and those of the policy authorities could be aligned in the context of achieving stable economic and financial conditions from a longer term perspective. thank you.