upon the foreign exchange rate system in east asia. for companies vigorously engaged in business in east asia, the stability of east asian currencies is a prerequisite for expansion. as i have often stated elsewhere, foreign exchange rates should be determined in a stable manner reflecting economic fundamentals. in an open economy, we cannot simultaneously achieve a fixed foreign exchange rate, free capital flows, and independent monetary policy. for example, many industrialized countries, including japan, enjoy free capital flows and independent monetary policy at the expense of having floating foreign exchange rates. on the other hand, china seeks a de facto fixed foreign exchange rate and independent monetary policy at the expense of regulated capital flows. although china is gradually easing regulations on capital outflows, the deregulation of capital flows may cause instability if unaccompanied by reform of the domestic banking system, as the experience of the asian currency crisis shows clearly. one orthodox way to achieve sustainable economic growth is to gradually remove capital controls and make the foreign exchange rate system more flexible in tandem with reform of the domestic banking system and strengthening of the financial system. v. role of the bank of japan finally, let me discuss the role of the bank of japan in the context of deeper interdependence between japan and the rest of east asia. in brief, what the bank can do is to provide japanese companies with a stable financial and economic environment to support their innovative business activities under globalization. let me elaborate. first, needless to say, the sound development of the japanese economy is one of the most important prerequisites for stable economic growth in east asia. to this end, the bank is working to overcome deflation and put the economy back onto a sustainable growth path by maintaining the current quantitative easing policy. second, the bank is strengthening regional financial cooperation with central banks in the rest of east asia. such a direction has gained further momentum since the asian currency crisis of 1997 - 98. in the wider context of ensuring the stability of the international financial system, the importance of establishing a collective and regional financial support system has been widely recognized among east asian economies. in this regard, japan has already entered into currency swap agreements, in the form of liquidity support, with korea, thailand, the philippines, malaysia, china, and indonesia. discussion on developing bond markets in east asia is underway in various international forums. the bank has taken an initiative in such discussions in close cooperation with the japanese government. recent examples include the bank

##al pigou effect, ” which is independent from the portfolio rebalancing effect. or, it can be called the “ intertemporal walras law ” because it focuses on the effect on budget constraint of the fact that the discounted present value of the real balance of debt of the government sector, which is equal to the discounted present value of the real balance of financial assets of the private sector, will not become zero even in the distant future. this effect is created because the private sector anticipates an increase in its wealth in the future. another prescription similar to the one proposed in the speech is a combination of non - ricardian fiscal policy and the policy of increasing the monetary base by k percent as suggested by benhabib et al. ( 2002 ). my prescription differs from the prescriptions of eggertsson and woodford ( 2003 ) as well as benhabib et al. because it focuses on the trend change in the income velocity of the monetary base, which is influenced by interest rate fluctuations, the rate of change in inflation, and the progress of nonperforming loan disposals. the decrease in the trend change in the income velocity of the monetary base is currently around minus 11 percent. adding a desirable nominal growth rate as well as the difference between the desirable nominal growth rate and the actual nominal growth rate to the 11 percent would produce a desirable rate of increase in the monetary base, which would achieve the desirable nominal growth rate. to the extent necessary to achieve medium - to long - term policy targets, the private sector will feel less uneasy about increasing spending, which, in turn, will make monetary policy more effective. the bank of japan clarified its commitment to continue its quantitative easing policy, which began in march 2001, specifying the following from the viewpoint of enhancing transparency. the bank will continue its current quantitative easing policy until, ( i ) the underlying trend of the year - on - year rate of increase in the core cpi marks zero percent or higher for a few months, and ( ii ) the majority of policy board members forecast that the prospective year - on - year rate of increase in the core cpi will register above zero percent during the forecasting period. these two conditions are necessary conditions. in some cases, the bank may judge it appropriate to continue quantitative easing even if these conditions are fulfilled. to overcome deflation, the bank aims to stabilize not only short - term interest rates but also longerterm rates through its commitment to