firm level rather than system - wide analysis which is critical for the stability of the financial system. system - wide risks need to be assessed in two ways. 3 as a starting point, they need to be evaluated on a cross - sectional basis at a specific point in time. both financial institutions and authorities need to look beyond individual products, risks and institutions. the dispersion and concentration of various types of risks together with how they interact within financial markets need to be evaluated. additionally, system - wide risks need to be reviewed dynamically as it evolves over time. this is the pro - cyclicality problem, i will touch upon next. risk exposures which may seem to be reasonable under benign economic and market conditions, may increase dramatically during times of stress. the fluctuation of risks as they change along with macro - economic environment needs to be carefully assessed as well. these steps are quite challenging, but have become essential in this globalized and fast changing financial system. mervyn king ( 2009 ), “ finance : a return from risk ”, speech at the mansion house. mitigating pro - cyclicality the second perspective concerns pro - cyclicality, the feedback mechanisms between the financial and real sectors of the economy. can we expect financial institutions to take into consideration system - wide implications in making their business decisions? probably not automatically. financial institutions face strong competitive pressures. procyclicality is human nature. such tendencies could be exacerbated, for example, by short - termism built into compensation schemes. another element which influences pro - cyclical behavior is the macro - economic and financial environment. looking back at bank behavior since the beginning of this decade, interest rates fell in a low inflation environment, banks and other market participants initially increased duration risks, by increasing their holdings of longer - term assets. then they took on more credit risk investing in a wider range of products. as profits pressures increased, they additionally used more leverage to enhance returns. considering the competitive pressures in the markets, behavior of individual entities was quite rational. this is what “ search for yield ” is all about. even though risk management at the institution level regarding individual risk factors may have been appropriate, risks were accumulating on a system - wide basis. what is necessary to avoid such accumulation of risks through pro - cyclical behavior? to begin with, proper incentive structures need to be incorporated into rules and market practice. for example, senior management requires incentive structures which have time horizons that are

haruhiko kuroda : the bank of japan's semiannual report on currency and monetary control statement by mr haruhiko kuroda, governor of the bank of japan, before the committee on financial affairs, house of representatives, tokyo, 18 november 2022. * * * introduction the bank of japan submits to the diet its semiannual report on currency and monetary control every june and december. i am pleased to have this opportunity today to talk about recent economic and financial developments and about the bank's conduct of monetary policy. i. economic and financial developments i will first explain recent economic and financial developments. japan's economy, despite being affected by factors such as high commodity prices, has picked up as the resumption of economic activity has progressed while public health has been protected from the novel coronavirus ( covid - 19 ). overseas economies have recovered moderately on the whole, but slowdowns have been observed, mainly in advanced economies. exports and industrial production have increased as a trend, with the effects of supply - side constraints waning. corporate profits have been at high levels on the whole, and business sentiment has been more or less unchanged. in this situation, business fixed investment has picked up, although weakness has been seen in some industries. the employment and income situation has improved moderately on the whole. private consumption has increased moderately, despite being affected by covid - 19. with regard to the outlook, japan's economy is likely to recover, with the impact of covid - 19 and supply - side constraints waning and with support from accommodative financial conditions and the government's economic measures, although it is expected to be under downward pressure stemming from high commodity prices and the slowdowns in overseas economies. the year - on - year rate of increase in the consumer price index ( cpi ) for all items excluding fresh food has accelerated due to rises in prices of such items as energy, food, and durable goods. regarding the outlook, it is expected to decelerate from the beginning of calendar year 2023 toward the middle of fiscal 2023 because the contribution of such price rises to this cpi is likely to wane. thereafter, it is projected to accelerate again moderately on the 2 back of improvement in the output gap and rises in medium - to long - term inflation expectations and in wage growth. concerning risks to the outlook, there have been extremely high uncertainties for japan's economy, including the following :