Revisiting the Philosophy behind Central Bank Policy *

The current financial crisis which started in August 2007 is the worst crisis since the Great Depression. I assume many of us knew of past financial crises, but did not expect to actually experience a crisis of this scope and magnitude during our lifetimes. When Japan was experiencing the asset price and credit bubble more than 20 years ago, I myself certainly did not anticipate the severity of the crisis which Japan was to experience. Japan experienced its crisis more than ten years ago, but watching the US-triggered financial crisis unfold and spread across the global financial system, I cannot help but feel a sense of deja vu. There are a number of similarities between the two episodes, for example, optimism immediately after the bursting of the bubble, delay in implementing some key policy measures, a prolonged