Financial Market Globalization: Present and Future

It is widely recognized that financial market globalization has been developing. International financial markets have expanded substantially, and transaction volumes in foreign exchange markets and capital markets have increased markedly. Progress in information and telecommunications technologies, liberalization in capital markets, and development of new financial instruments have further stimulated international capital flows, leading to more expansion and efficiency in international financial markets. However, empirical evidence suggests that national borders have been serving as some sort of barriers to international capital flows. Portfolios of investors based in industrialized countries are biased toward domestic assets (the "home bias puzzle"), and national savings tend to be absorbed domestically (the "Feldstein-Horioka paradox"). From a long-term historical perspective, the size of net capital flows has not increased so much. Alternatively, such development of globalization can be viewed differently once we take account of other aspects such as off-balance sheet transactions. Derivative instruments offer the possibility of unbundling risks inherent in underlying assets, and such unbundled risks can be repackaged and dealt in separately. Thus, cross-border derivatives transactions enhance the effectiveness of risk transfer. Given the recent growing trend toward financial globalization, how and at what pace financial globalization will develop in the future have important implications for the conduct of monetary policy by central banks. If financial markets become further integrated and international capital flows more actively, it is obvious that independent monetary policy directed toward domestic goals, liberalization of capital mobility, and fixed foreign exchange rates cannot be achieved simultaneously. In addition, prudential policy might face new problems pertaining to the stability of the financial system due to increasing international linkage

The Asset Price Bubble and Monetary Policy: Japan's Experience in the Late 1980s and the Lessons: Background Paper

Since the latter half of the 1980s, Japan's economy has experienced the emergence, expansion, and bursting of a bubble economy, characterized by a rapid rise in asset prices, the overheating of economic activity, and the expansion of money supply and credit. This paper examines the mechanism by which the bubble economy was generated and summarizes lessons a central bank should draw from the experience in order to prevent it from happening again. Specifically, by focusing on the intensified bullish expectations that played an important role behind the large fluctuations in asset prices and the economy, the process of the emergence, expansion, and bursting of the bubble is examined in relation to the monetary policy at the time. Based on this analysis, the paper discusses a framework for monetary policy conducive to achieving both price stability and financial system stability.

Way out of Economic and Financial Crisis: Lessons and Policy Actions

Speech at Japan Society in New Yor

Uniqueness or Similarity? Japan\u27s Post-Bubble Experience in Monetary Policy Studies

Keynote Address at Second IJCB Fall Conference hosted by the Institute for Monetary and Economic Studies, the Bank of Japa

Deleveraging and Growth Is the Developed World Following Japan Long and Winding Road

Lecture at the London School of Economics and Political Science (Co-Hosted by the Asia Research Centre and STICERD, LSE

Japan's Deflation, Problems in the Financial System, and Monetary Policy

This paper offers three analyses of Japan's macroeconomic experience during the post-1990 period. First, we analyze various facets of deflation during the period, arguing that the deflation of general prices has by no means been a major factor for the stagnating economy. In contrast, the deflation of asset prices was closely related to the economic difficulty of the period. In particular, the negative shocks generated by sharp declines in asset prices in the early 1990s have been propagated and amplified by their interaction with the deterioration in the condition of the financial system. Some statistical evidence supports this view. Second, we analyze the effects of monetary policy adopted by the Bank of Japan (BOJ) to fight deflation since the late 1990s. Given that short-term interest rates were already nearly zero in the mid-1990s, policy measures have focused on creating monetary easing effects beyond those created by zero interest rates alone. We show that the zero interest rate policy, which includes a commitment to maintain a zero interest rate for a longer period than that suggested by a baseline monetary policy rule, has produced strong effects on expected future short-term interest rates and thus the entire yield curve. Third, we argue that the BOJ has successfully prevented a repetition of the 1997-98 type liquidity crisis by directing market operations at addressing the financial-sector problems. These operations have taken the form of containing risk and liquidity premiums, particularly in the money market, through proactive provision of liquidity as well as the BOJ's own risk- taking activity.