in the form of the expansion of credit and leverage, and the increase in maturity mismatches. financial regulation and supervision let me now move on to financial regulation and supervision. since the mid - 2000s, central banks and supervisors had sent out warning signals on the perceived excesses of various transactions through financial stability reports and speeches. however, beyond such steps, too few remedial actions were taken vis - a - vis individual financial institutions. of course, it is always quite difficult to take preemptive action on individual financial institutions. but going beyond such general comments, i believe the following reasons can be given for this constraint. with regard to the appropriateness of the phrase, “ lost decade ”, see shirakawa ( 2009 ). see box1. 1 “ could deflation become a global problem? ”, imf ( 2003 ). federal reserve bank of kansas city ( 2003 ). first, confidence in the effectiveness of private sector self - regulation or the disciplinary mechanisms built into financial markets may have been too strong. the continued benign conditions of the macro economy also had an effect. in the “ wealth of nations ”, adam smith emphasized the benefits of free competition. however, it seems he was also concerned about leaving market forces alone to dictate all aspects of economic activity. case in point is the area of finance. he noted that if the rate of interest were to become too high, the greater part of the money would be lent to prodigals and projectors, and money would be kept out of the hands of sober people 7. before the current crisis, i had not made much of these words by smith, but now i have come to feel that i need to assess its implications more carefully. second, authorities became more cautious about the discretionary use of their supervisory powers. regulation is a necessary tool in maintaining financial stability, but it is not possible to design regulation beforehand which can be applicable to all future situations. therefore, effective supervision becomes important. what becomes necessary is a form of supervision which is adaptable to each financial institution ’ s unique risk profile. naturally, such supervision must involve some elements of discretion. however, as the pressure for stringent and prompt accountability increased, supervisors became more cautious about exercising such discretionary powers. third, both central banks and supervisory agencies were lacking the perspective of assessing the risks of the financial system as a whole. the traditional philosophy of regulation and supervision was that if the health of individual financial institutions is maintained, the

statistics released last week indicate, for example, a rise in the unemployment rate, raising some concerns of an economic slowdown. i believe that the u. s. economy will most likely have a soft landing, for the following reasons. first, it seems that productivity in the united states has increased due to such factors as the movement of labor resulting from the pandemic. second, since change in the real economy, including labor market conditions, occurs in moderation, it is possible to address developments through policy interest rate cuts or other policy actions. if the u. s. real economy heads toward a soft landing, this will likely be reflected in financial and capital markets, including stock prices. however, since market developments are naturally more rapid than real economic developments, attention is warranted on the risk of current developments in financial and capital markets feeding into the real economy. i will refer to developments in financial and capital markets later, in relation to the conduct of monetary policy. ii. price developments and structural changes in the labor market current situation of and outlook for prices next, i will move on to price developments. please take a look at chart 5. as shown by the red line, the year - on - year rate of increase in the consumer price index ( cpi ) for all items excluding fresh food has decelerated moderately, albeit with fluctuations. the latest figure, which is for june, stands at 2. 6 percent. looking at the breakdown, the contribution of food products, shown by light blue bars, and that of other goods, shown by dark blue bars, have continued to be affected by a pass - through to consumer prices of cost increases led by the past rise in import prices. with these pass - through effects waning, however, the positive contributions of food products and other goods have decreased moderately. the pink bars show that the positive contribution of services has also decreased to some extent. taking a closer look at developments in services prices, however, a mechanism whereby wage increases moderately push up services prices is gradually becoming evident. chart 6 shows the distribution of the year - on - year rates of change in prices of individual items that make up the cpi for services. please take a look at the left - hand graph. for april 2023, the distribution had a large peak at around 0 percent. while there was another peak at around 10 percent, this peak comprised dining - out and other items for which prices were affected by the rise in raw material costs, meaning that their high