haruhiko kuroda : opening remarks opening remarks by mr haruhiko kuroda, governor of the bank of japan, at the 2013 bank of japan - institute for monetary and economic studies ( imes ) conference, hosted by the imes of the bank of japan, tokyo, 29 may 2013. * i. * * introduction good morning, ladies and gentlemen. it is my great honor to say a few words at the beginning of the 2013 boj - imes conference. on behalf of my colleagues at the bank of japan and myself, i would like to welcome all the participants from the academia, central banks, and international organizations. this year, we are going to tackle the issue of “ financial crises and the global financial system. ” it is no doubt a very familiar theme for all of you. in fact, we have discussed this topic time and again. every time we faced an international financial crisis – we had far too many of them – the international financial system had to evolve in response, and that called for new ideas, or at least, new twists on old ideas. this was no easy task, as many of you, who were my colleagues in arms, would attest without any hesitation. working on the front lines of international finance in the recurring process of turbulence and evolution of the global financial system, under many different hats, i have always struggled with seemingly intractable problems, such as large fluctuations in the exchange rate and huge swings in the flows of capital. in retrospect, past discussions and responses regarding the global financial system did not follow a straight line. we saw a series of trials and errors. karl popper, who was a philosopher of scientific methodology, mentioned that for the quest of the truth, “ there is no more rational procedure than the method of trial and error. ” 1 through repeated trials and errors in every past financial crisis, economics has actually accumulated new wisdom. as we face the formidable task of rebuilding the international financial system severely hit by the most recent financial crisis, our trials and errors from the past will certainly provide us with valuable insights. ii. the role of the trilemma of international finance in the evolution of the global financial system in light of wisdom that has been accumulated so far, the starting point of discussion on the organization of a global financial system is the trilemma of international finance. as you know, the trilemma shows that no economy can simultaneously achieve the three goals of capital mobility, a fixed exchange

second, these massive capital inflows, together with their favorable economic expansion, have pushed stock prices to historical peaks and brought about a rapid increase in property prices. such developments, if continued for an extended period without appropriate policy actions, would increase the unwelcome risk of asset price bubbles. third, increases in asset prices and bank lending are stimulating excessive consumer spending and business investment through wealth effects, leading to the risk of an overheating economy and accelerating inflation. indeed, inflationary pressures and inflation expectations have been rising in many asian emerging economies, fueled also by the recent surge in commodity prices. in response to these challenges, many asian economies have adopted short - term policy responses, such as restrictions on capital inflows and macro - prudential policy measures, as well as foreign exchange market intervention. since last year, they have introduced a variety of quantitative regulations and tax measures to mitigate the risks that excessive capital inflows may cause. moreover, in an effort to curb overheated property investment, they have strengthened regulations and taxation on property transactions, lowered the required loan - to - value ratio for financial institutions, and imposed tighter limitations on bank loan volumes. these specifically targeted policy actions have indeed begun to take effect. for example, the upward pressure on property prices seems to have eased somewhat in several economies. however, such favorable effects may be the exception, and these policies may have unintended adverse effects on the economy if they are in place for longer than necessary, such as distorting optimal credit allocation and impeding necessary structural reforms. moreover, temporary success in these short - term measures may tempt policy makers into postponing measures necessary to cope with real and fundamental problems. in particular, monetary and other macroeconomic policy actions must not fall behind the curve. although the increase in interest rates may attract further capital inflows, we should not rely too much on the above - mentioned short - term regulatory and macro - prudential measures. as was evident from japan ’ s experience of the past bubble, delayed monetary and macroeconomic policy responses may bring about an accumulation of “ excesses ” in employment, business capacity, and debt under an inflexible labor market or high investment irreversibility. such accumulated excesses may persist for an extended period, and may hamper economic growth in the years following. after all, regulatory and macro - prudential measures are supplementary to, but not substitutive for traditional or conventional