made the difference to the time scale and acceleration? innovations and structural changes over the last two decades have no doubt played an important role, namely globalization, advances in information communication technology, and financial innovations and sophistication. indeed, compared with japan in the 1990s, the current crisis is far more complex, interconnected and global. accordingly, the velocity of market dysfunction has been much faster and its contagion much more widespread than in japan ’ s case, and the damage inflicted on the global financial system and economy has been far more devastating than japan ’ s non - performing loan problem. 2. lesson two the second lesson we have learned from the crises is that once an adverse feedback loop has been started, it is extremely difficult and costly to stop it and to restore confidence. this was the essence of japan ’ s experience ; a series of fiscal stimulus packages and an accommodative monetary policy could not generate sustained economic growth, as the financial system was severely impaired and market confidence continued to be eroded. injections of public capital in 1998 and 1999 were also, in retrospect, not sufficient to convince the market to jump - start the economy. this is evident in chart 2. at the same time, it was clear that the japanese economy was suffering from a significant productivity slowdown from its peak in the 1980s. so when and how did japan ’ s adverse feedback loop stop? with hindsight, perhaps the turning point was october 2002, when the financial services agency urged major banks to halve their npl ratios by the end of march 2005, and pledged to monitor their efforts continuously and rigorously. the bank of japan also urged banks to carry out more rigorous evaluations of npls, and to dispose of them promptly based on those evaluations. in retrospect, the timing coincided with the reflection point at which the economy had just passed the trough of the 2001 recession, and began to recover, thanks to strong export demand due to the vigorous world economy. this was also the time when substantial progress was being made in corporate restructuring with respect to the so - called “ three excesses ” : debt, employment and production capacity. this restructuring helped the final pick up. in this way, the japanese economy was, in general, out of the woods around 2005, although some regional economies lagged behind, having benefited less from the global growth. 3. lesson three i will move on to the third lesson and ask the following question : “ is it possible to solve

problems with troubled assets at an early stage? ” i find the answer is unfortunately negative : “ it is very difficult ”. this is because when the valuation of troubled assets becomes highly uncertain, in the way frank knight described here in chicago eighty - some years ago, a “ wait and see ” strategy may be the natural reaction for both sellers and buyers 1. so, private initiatives alone may not be sufficient to solve the problem. we have a list of such private attempts, with the fate of the m - lec among them, as well as the cooperative credit purchase corporation in japan in 1993. at the same time, it becomes increasingly difficult and costly for financial institutions with troubled assets to raise capital once the market becomes suspicious. however, governments usually face severe difficulty gaining public support for intervention in the early stages of a crisis, as we have seen recently, while the financial institutions themselves seek to avoid stigma and government interference. 4. lesson four what is the core of the problem? lesson four of the crises is that it is the difficulty in getting “ reasonable estimates ” of losses and a “ reasonable pricing ” of troubled assets, on which both see nishimura, k. g., and h. ozaki, “ irreversible investment and knightian uncertainty ” journal of economic theory 136 ( 2007 ), pp668 - 694. sellers and buyers can agree, that leads to erosion in confidence. it is this erosion in confidence which then leads to an “ excessive ” aversion to uncertainty. there are a number of related factors which have contributed to the current erosion in confidence. firstly, troubled assets have had macro - systemic effects, including unprecedented levels of downside - correlation. secondly, these troubled assets ’ losses were dynamic and evolved over time. the “ estimated losses ” increased continuously as the economy slid into stagnation. valuation of these assets, based on pre - crisis norms, grossly and consistently underestimated the losses, leading to an erosion of confidence in valuation methods and ultimately in the solvency of the institutions with these assets. moreover, troubled assets were very heterogeneous, and the erosion of confidence in existing valuation methods set an adverse selection mechanism in motion, leading to a marked deterioration in market liquidity. let me briefly summarize the implications of erosion ( or contamination ) of investors ’ confidence in financial institutions. once they lose confidence, these investors face “ unknown unknowns ” that they never dreamed of before. they then become “