hirohide yamaguchi : strengthening growth potential, role of the market, and “ production of information ” remarks by mr hirohide yamaguchi, deputy governor of the bank of japan, at the securities analysts association of japan annual conference commemorating its 50th anniversary, tokyo 15 october 2012. * * * introduction thank you for having me at the annual conference jointly hosted by the securities analysts association of japan ( saaj ) and asian securities and investments federation ( asif ). all the participants here have been striving for the development of securities markets, and, through such efforts, have been contributing to the sound development of japan ’ s economy. on behalf of the bank of japan, i will pay great respect to your efforts. today, under the title “ strengthening growth potential, role of the market, and ‘ production of information ’, ” i will talk about my views on the importance of the financial function that supports economic growth and how securities markets should be, and then i will send cheers to securities analysts while referring to their expected roles. i. japan ’ s economy and securities markets 50 years ago, in 1962 when the saaj was established, japan ’ s economy was in the midst of a high growth period. japan ’ s economy grew by an annual average of 9. 7 percent from 1956 up to 1970. it made a transition to stable growth, triggered by the oil shocks, but was on a constant growth path until a bubble burst at the beginning of the 1990s. after the burst of a bubble, things changed completely and the average growth rate declined substantially to around 1. 5 percent in the 1990s and around 0. 5 percent in the 2000s. the history of securities markets developed in tandem with such a long - term trend in the real economy. during the high growth period, firms ’ buoyant fund demand was mainly supported by indirect finance. however, even during such period, the securities markets gradually came close to people as the phrase “ goodbye banks, hello securities firms ” began to be heard in the early 1960s when investment trust started to spread among people. subsequently, the markets continued to grow by weathering trials, including securities markets ’ slump after the tokyo olympics and, in the 1980s, both the stocks market and the corporate bonds market got into full swing amid financial liberalization and globalization. while equity finance by convertible bonds and warrant bonds rapidly increased during the bubble period on the back of strong expectations for a rise in stock prices, market expansion based on excessive expectations did

the problem. in those days, we made the most of academic wisdom, but we often encountered the situations that were not well captured by the existing economic theory. for example, financial imbalances were built up under benign economic conditions, through sharp credit expansion, outsized leverage, and soaring asset prices. 2 after the burst of the bubble, market participants suddenly lost their confidence and reduced their risk - taking capacity. as a result, japan ’ s 1990s is often referred to as the “ lost decade. ” for the appropriateness of such characterization and policy responses, see shirakawa ( 2009a ). among the papers contributed to the conference, hattori, shin, and takahashi ( 2009 ) revisit japan ’ s bubble in the 1980s by shedding light on the changes in money flow behind the expansion of the bubble. the effectiveness of monetary policy was severely constrained. further monetary policy responses with unorthodox measures were adopted. the effectiveness of monetary policy measures crucially depends on the central bank ’ s credibility, which is partly affected by the soundness of central bank balance - sheet and central bank ’ s neutrality perceived by the public at large. all in all, those experiences seem to show that textbooks on macro and monetary economics need some new chapters on the interaction between the financial system and monetary policy. the way of thinking about monetary policy management has certainly changed since the outbreak of global financial market turmoil in the summer of 2007. in particular, since the collapse of lehman brothers in september last year, the policy discussions have changed further with the first - hand experiences of the downward spiral in both the financial and real sectors of the economy. it has turned out that japan ’ s experience is no longer unique. adoption of unprecedented policy measures : japan ’ s experiences i will provide a basis for discussion by reviewing the bank of japan ’ s policy implementation during the financial crisis after the burst of the bubble, especially since the late 1990s. of course, various measures were taken in the fields of central banking. here my focus is on monetary policy. the bank of japan ’ s policy responses can be summarized into five points. first, the bank lowered overnight interest rates in the interbank market down to virtually zero, eventually just one - tenth basis points ( 0. 001 percent ). second, the bank provided ample excess reserves by using various tools for monetary operations, including an increase in the outright purchase of long - term government bonds. for the smooth provision of ample liquidity, the maturity of monetary