Financial stability and the central banks’ key objective of price stability are obviously connected, both directly and indirectly through the real economy. But a stable financial system also fosters greater integration of the financial markets. And the more integrated the financial markets are in the euro area, the more effective will be the transmission of ECB’s monetary policy decisions.
This is because, under a deflationary slump, the pain caused by promoting competition through deregulation encounters strong resistance. One often refers to “creative destruction”, but under deflation there is no creation after destruction. Furthermore, even though structural reform is making progress under the growth strategy, it is supply-side policy that enhances the production capacity of Japan’s economy.