using the phrase of a “ false dawn ”, when we first saw some signs of economic recovery in advanced economies in the spring of 2009. 2 for a comparison between japan ’ s experience after the burst of the bubble and the u. s. and european experience in the recent financial crisis, see shirakawa, masaaki, “ uniqueness or similarity? – japan ’ s postbubble experience in monetary policy studies – ”, keynote address at second ijcb fall conference hosted by the institute for monetary and economic studies, the bank of japan, september 16, 2010 ( available at http : / / www. boj. or. jp / en / type / press / koen07 / ko1009c. htm ). see shirakawa, masaaki, “ way out of economic and financial crisis : lessons and policy actions ”, speech at japan society in new york, april 23, 2009 ( available at http : / / www. boj. or. jp / en / type / press / koen07 / ko0904c. htm ). second, the sharp contraction of economic activity after the burst of the bubble in japan occurred when interbank funding markets became destabilized. that decline, however, was much smaller than those in many countries, including japan, after the failure of lehman brothers in the fall of 2008. looking at real gdp data, japan recorded the largest decline by 1. 9 percent in the first quarter of 1998, but, in the recent global financial crisis, even the united states, which showed the smallest decline after the failure of lehman brothers, registered the huge decline by 3. 0 percent during the period from the fourth quarter of 2008 to the first quarter of 2009 ( chart 3 ). the two cases have the common trigger of an interbank market participant default. third, japan has experienced mild deflation, but has not experienced a deflationary spiral, by which i mean that a decline in prices induced a decline in economic activity, thereby leading to a further decline in prices. consumer price inflation turned negative in 1998, and from 1997 to 2007, before the current crisis, it declined by 3. 3 percent on a cumulative basis, and 0. 3 percent on an annualized basis ( chart 4 ). under mild deflation, however, japan registered the longest recovery from 2002 to 2007, just in duration without considering its strength ( chart 5 ). fourth, labor practice significantly influenced

innovative monetary policy measures on a large scale as a pioneering effort. for example, the boj reduced the overnight interest rate to virtually zero in the second half of 1995, of which level corresponds to the current policy interest rates in the united states and european countries. the boj also expanded its balance sheet size considerably. from 1995 when the overnight interest rate fell down to virtually zero, the ratio of the boj ’ s balance sheet size to nominal gdp increased by more than 20 percentage points at its peak ( chart 10 ). that increase in the ratio for the boj was twice as large as that in the u. s. federal reserve ( fed ), the european central bank ( ecb ), and the bank of england ( boe ) in the recent crisis. in addition, the boj made a policy commitment to continuing the quantitative easing policy “ until core cpi inflation becomes stably zero or above ”. the boj adopted “ credit easing ” in the current terminology, ahead of central banks in the world. the boj purchased asset - backed securities ( abss ), asset - backed commercial papers ( abcps ), and even stocks held by financial institutions to reduce market risk associated with stockholdings, which was one of the biggest risk factors in potentially destabilizing the financial system. in retrospect, the boj introduced various unprecedented measures under the uncharted circumstances during the period from the late 1990s to the early 2000s. such measures involved most of the elements in the unconventional policy measures taken in the recent global financial crisis. nevertheless, it took a fairly long before the japanese economy restored the full - fledged recovery path. and that fact suggests the severity of the balance sheet adjustments i have mentioned earlier. in any event, without sufficient public understanding about the fact that we need a long time to complete balance sheet adjustments, the delay in the recovery in the macroeconomic performance is likely to provoke social discontent. that tends to create the social climate, which is prone to induce policy measures inconsistent with economic efficiency. that leads to the fourth point in economic policy challenges. fourth, we need to pay more attention to the importance of maintaining the flexibility of the economic structure. as i discussed earlier, japan ’ s “ lost decade ” was crucially attributed to the decline in population and productivity. in that sense, if foreign countries mistakenly draw the most crucial lesson from japan ’ s experience as the necessity of short - term stimulative policy measures, they will face a risk