while the flows on account of equity, foreign direct investment ( fdi ) into green field issues may be considered to be of a more permanent nature, flows on account of buy - outs through channels that are only technically fdi may not constitute a stable element. overall, the portfolio investments could be expected to be less stable than fdi. the market participants ’ views on what constitutes excess volatility are also critical in this regard. second, large and lumpy quantities, even when expected, tend to disturb the markets and hence, there is a need to even - out the impact of such lumpy flows through policy interventions and statements, appropriately managing the expectations in the market. third, while interventions are with the objective of containing volatility in the forex market, intervention over a long period, especially when the exchange rate is moving in one direction, could make interventions less effective. however, a critical question is what would be the impact on expectations about future movements in forex markets if no intervention takes place. the challenges of intervention and management of expectations will be particularly daunting when financial contagion occurs, since such events are characterised by suddenness, high speed and large magnitudes of unexpected flows, in either direction. the quintessence for a relevant monetary policy is the speed of adjustment of the policy measures to rapidly changing situations. fourth, a related issue is whether there should be sterilised intervention and if so, the timing and quantum of such interventions. there is usually a cost attached to sterilisation operations. at the same time, it is also necessary to assess the indirect cost of not sterilising if there are signs of a “ dutch disease ” caused by flows in the capital account. most often, it is not a question of whether to sterilise or not, but how much to sterilise. that is an important issue of judgment that needs to be made in conjunction with domestic monetary and liquidity conditions. fifth issue, relates to the choice and an appropriate mix of instruments for sterilisation. each instrument, namely, market stabilization scheme ( mss ), liquidity adjustment facility ( laf ) and cash reserve ratio ( crr ), has different features and interactions. utilisation of each of these will also depend on what is the permanency of the components of the flows and how they should be sterilised in the aggregate. further, each instrument can be used in different ways. the laf is able to

firms and households can achieve necessary financing from financial markets and financial institutions at low costs. the second stage is the transmission of effects from the financial conditions to economic activity and prices ; in other words, the extent to which firms and households can take advantage of the accommodative financial conditions to increase their investment and spending. increase in the size of the asset purchase program : stimulating the first stage of the monetary transmission mechanism among the decisions at the monetary policy meeting on october 30, the increase in the size of the program is aimed at stimulating the first stage of the transmission mechanism more forcefully ( chart 7 ). the program was introduced in october 2010 in order to generate further easing effects in a situation where the overnight call rate – that is, the bank ’ s target rate – had already been at virtually zero percent. through the program, the bank purchases not only japanese government bonds ( jgbs ) and t - bills but also various types of risk assets, including cp, corporate bonds, exchange - traded funds ( etfs ), and japan real estate investment trusts ( j - reits ). such purchases of risk assets are unprecedented for a central bank ( chart 8 ). the aim of the program is to encourage a decline in longer - term market interest rates and a reduction in risk premiums. since the introduction of the program, longer - term market interest rates have been declining steadily ( chart 9 ). government bond yields up to three years have declined to an extremely low level of 0. 1 percent. the 5 - year bond yields have come to nearly 0. 2 percent. reflecting such developments in the market rates, bank lending rates have also been declining. recently, these rates, both in the short term and long term, have hit 1. 0 percent – an unprecedented level. the lending attitudes of financial institutions as perceived by firms have also improved clearly, and have reached a level that exceeds the average since the 2000s. the issuing conditions for cp and corporate bonds are also accommodative on the whole. the bank decided to increase the size of the program with additional purchases of a wide range of assets that comprise not only jgbs but also risk assets including etfs. through such measures, the bank intends to firmly maintain extremely accommodative financial conditions, even after entering next year, and support japan ’ s economy forcefully from the financial side. establishment of the stimulating bank lending facility : stimulating the second stage of the monetary transmission mechanism on top of this, the