First, financing of growth can be an issue with significant dependence on external resources. Second, domestic currencies tend to fall with reversal of capital flows. Third, bank-intermediation is also adversely affected as was observed during the recent crisis. Under such circumstances, countries with well functioning and liquid local bond markets cope better with shocks and the risks stemming from frozen credit markets.
This reflected greater uncertainty about the outlook for the Japanese economy due partly to instability in the stock and foreign exchange markets, in addition to uncertainty about overseas economies. With such significant uncertainties, the risk of further instability in financial markets adversely affecting economic activity was a cause for concern.