, the economy ’ s natural rate of interest, cannot be observed in reality, but only, in the best of cases, estimated indirectly. accordingly, the central bank needs to analyse a broad range of indicators in order to infer the state of the economy, so as to be able to determine the appropriate monetary policy stance. this conceptual framework worked satisfactorily during the 1990s and the early years of the current century, a period known as the “ great moderation ”, characterised by stable growth in the advanced economies and relatively low levels of inflation. however, the economic and financial crisis that began in 2007 - 2008 forced central banks to adopt innovative policies and, on occasion, to navigate “ uncharted waters ”. this is the subject i wish to talk about in the final part of my speech. the monetary policy challenges arising from the crisis the magnitude of the crisis that began in 2007 - 2008 led the central banks of the main developed economies to design and implement expansionary monetary policies of unprecedented magnitude and scope. the crisis had a significant effect on banks and other financial intermediaries, leading to a contraction in credit and, therefore, in economic activity. this led the main central banks to introduce various measures to provide liquidity to their banking systems at times of market malfunctioning. in addition, asset purchase and medium and long - term financing programmes were launched that avoided a systemic crisis which would have led to the failure of a large number of banks and, undoubtedly, to an enormous crisis in the real economy, as during the “ great depression ” in the 1930s. even so, the severity of the recession led to a very sharp contraction in demand, and ultimately to inflation rates that were too low and incompatible with the mandate of the central banks of the main advanced economies. this situation forced them to reduce the interest rates determined by monetary authorities to historic lows. some central banks, such as the ecb and those of japan, sweden, denmark and switzerland, reduced rates to negative levels. 5 / 7 in fact, one of the factors that has influenced the actions of central banks most in recent years has been the difficulty of reducing interest rates when they are already at very low levels. interest rates that are too low may mean that there is no incentive for financial intermediation, since, for example, it is more profitable to store money in cash than to deposit it in the banking system. what should we do then when rates are very low and the economy still requires

masaaki shirakawa : japan ’ s economy and monetary policy speech by mr masaaki shirakawa, governor of the bank of japan, at the kisaragi - kai meeting, tokyo, 4 november 2010. * * * introduction i am privileged to have an opportunity to speak before such a large audience. having said that, the timing of today ’ s speech has become somewhat uneasy for me. the policy board of the bank of japan has decided last week to bring forward the next monetary policy meeting to today and tomorrow to discuss and decide the principal terms and conditions for purchases of exchange - traded funds ( etfs ) and japan real estate investment trusts ( j - reits ) with a view to starting such purchases promptly. therefore, in my speech today, based on the outlook for economic activity and prices released last week, i will talk about the developments in the global economy, and then mainly about japan ’ s economic and price developments and the bank ’ s “ comprehensive monetary easing. ” while i make clear at the beginning that there will be no information that implies the decision to be made at tomorrow ’ s monetary policy meeting, i hope that my speech today will be of any use in enhancing your understanding on economies at home and abroad, as well as on the bank ’ s monetary policy. i. developments in the global economy the developments in the global economy since the failure of lehman brothers i will start with the developments in the global economy. the global economy plunged after the failure of lehman brothers in september 2008. behind that economic downturn were two factors. the first factor was a panicky contraction of economic and financial activity due to the financial crisis triggered by the failure of lehman brothers. that brought about acute effects on the economy. the second factor, which could be said as more fundamental, was the unwinding of various excesses that had been accumulated globally up to the mid - 2000s mainly in the united states and europe. that was a disposal process of excesses such as excess debt in the household sector, excess production capacity in firms, and impaired assets of financial institutions. namely, the process of repairing and adjusting balance sheets. during the repair and adjustment process, spending activity of each economic entity will be restrained. consequently, chronic downward pressure will be exerted on the economy for a protracted period. the global economy leveled out in the spring of 2009 and started to pick up, and that was mainly because the first - mentioned acute symptom settled. thanks to liquid