depending on economic and financial in november 1997, four financial institutions - - namely, sanyo securities, hokkaido takushoku bank, yamaichi securities, and tokuyo city bank - - went bankrupt in succession. conditions of the time. it is important to accurately assess such potential vulnerabilities of the financial system from a macroprudential perspective and take appropriate policy measures. even if these measures are extraordinary or unconventional based on historical standards, the bank should take these measures when necessary to ensure financial system stability. at present, japan's financial system is maintaining stability, but i think that attention should be paid to the potential vulnerabilities. that is what i will talk about today ; more specifically, the problem of financial institutions'low profitability and intensified competition, with a main focus on regional financial institutions. this problem is closely related to japan's structural problems, such as a decline in population and the number of firms, and it is a phenomenon that advanced economies have never experienced before ( chart 1 ). in this sense, the impact of financial institutions'low profitability and intensified competition arising from the decline in population and the number of firms is a financial vulnerability that takes a totally different form from the past. regional financial institutions need to appropriately address this issue in order to continue to play an important role in supporting the regional economy. the bank also has to explore a new frontier of prudential policy by itself. ii. assessment of systemic risk before going into a detailed explanation about the potential vulnerabilities of japan's financial system, let me first talk about macroprudential policy. if the financial cycle becomes large in magnitude or many financial institutions become more interconnected by increasing common exposure or forming mutual asset - liability arrangements, systemic risk will emerge and spread within the financial system. the objective of macroprudential policy is to strengthen the resilience of the financial system and contain systemic risk. in order to implement macroprudential policy, we first need to assess systemic risk. specifically, the assessment is composed of two main parts. the first is to assess the financial cycle. we examine whether the current conditions are in an expansion phase or a contraction phase of the cycle, considering the outlook. the second is to identify sources of systemic risk, or potential financial vulnerabilities, and to diagnose the financial system's resilience to the stress. for example, we conduct stress testing to assess whether financial institutions have sufficient

handbook of monetary economics, vol. 3a, 2010. bis central bankers ’ speeches one of the areas in which there has been considerable progress since the 1990s in theoretical and empirical research on monetary policy is research on policy rules, of which the taylor rule is a prime example. 7 studies in this area highlight the importance of systematically setting policy rates in line with changes in the macroeconomy in order to maximize monetary policy effects. put differently, they indicate that in order to ensure the effectiveness of monetary policy, the important thing is not to cause unanticipated shocks, but to maintain consistent and predictable policy responses ( chart 6 ). these considerations regarding the conduct of monetary policy essentially also apply to the conduct of unconventional policies. this means that, in order to raise the effectiveness of monetary policy, it is important to show in advance the policy options the central bank can use to address an exogenous shock to the economy large enough for interest rates to hit the zero lower bound. however, looking back at japan ’ s experience since the late 1990s and the policy response in the united states and europe following the collapse of lehman brothers, central banks essentially stumbled along in devising new policy measures to respond to the situation and problems facing them at the time. since in practice the world is full of uncertainty, it is difficult to present policy options for all contingencies in advance. moreover, because policy responses to unanticipated events are formulated by taking not only financial and economic circumstances but also various structural and institutional constraints into account, they tend to consist of a complex package of policies. the issue of what kind of institutional framework should be built in order to achieve an efficient allocation of resources in circumstances where such uncertainty is great and it is necessary to deal with complex challenges falls into the arena of incomplete contract theory. 8 research in this field has made rapid progress in recent years and the findings are applied in practice in a growing range of areas, such as firm organization, financial contracts, and legal systems. i think that, by employing the new understanding gained and considering a possible policy framework for comprehensive policy rules – including in response to crises – as well as the application of such rules, it may be possible to expand the research frontier of monetary policy. vi. long - term equilibrium while it is premature to talk about the timing of an exit from “ qqe with a negative interest rate ” and how to go about it, i would finally like to take the valuable opportunity of speaking here today