expected to increase moderately, but it is subject to various uncertainties. for example, with regard to the u. s. economic policies, heightened uncertainties concerning fiscal policy and the impact of the pace of the policy interest rate hike on global capital flows warrant attention. the following are also considered as risks : developments in emerging and commodity - exporting economies ; negotiations on the united kingdom ’ s exit from the european union ( eu ) and their effects ; prospects regarding the european debt problem, including the financial sector ; and geopolitical risks. if these risks were to materialize, they could exert downward pressure on economic activity. therefore, the bank will continue examining these developments thoroughly. ii. price developments and their outlook price developments let me move on to the price developments in japan. although energy prices had exerted downward pressure on prices since the second half of 2014, they have been pushing up prices reflecting a pick - up in crude oil prices since last spring. against this backdrop, the year - on - year rate of change in the consumer price index ( cpi ) for all items less fresh food turned positive in january 2017 for the first time in 13 months, and rose to 0. 4 percent in may ( chart 7 ). nevertheless, when excluding the effects of energy prices, price developments in japan have been relatively weak. the year - on - year rate of increase in the cpi excluding fresh food and energy has remained on a decelerating trend after marking a peak of 1. 2 percent at end - 2015, and has been at around 0 percent lately. this is partly attributable to temporary factors such as a reduction in sales prices of and charges for mobile phones. however, as i will explain later, the fact that increases in wages and prices have been sluggish, despite tight labor market conditions and high corporate profits, also affects price developments. outlook for prices as i have explained, the recent developments in prices have been relatively weak. however, i believe that we can expect to see a turnaround in such developments going forward. specifically, the year - on - year rate of change in the cpi is likely to continue on an uptrend and increase toward 2 percent, which is the bank ’ s price stability target. this is expected to be realized through the following mechanism. first, prices of items such as processed food and daily necessities — which are responsive to economic activity — are likely to rise gradually as private consumption increases its resilience, and the

the conduct of monetary policy – rather than one where it is incorporated in the baseline scenario. this is the basic concept behind the bank's approach, where it assesses the baseline scenario, or the most likely outlook – the assessment from the " first perspective " – while assessing various risk factors and the cost that would be incurred should risks materialize – the assessment from the " second perspective. " the latest outlook report provides, in the form of charts, the aggregated probability distributions compiled from the distributions attributed by individual policy board members to the likelihood of divergence upward or downward from their forecast, with the aim of providing more detailed and visual descriptions of the level of risks to the forecast. each chart shows a bell - shaped distribution with the most likely projection forming the top of the curve. the charts are called risk balance charts, since they indicate how the risks are distributed around the central view and how the distributions are skewed. the bank released these risk balance charts because it considered that risks that were not deemed most likely by the bank should also be described in a way that the public could understand easily. c. complex interdependency between financial and economic developments the third point i would like to mention is that there is a complex interdependency between financial and economic developments, and this should be fully taken into account in assessment of the economic and price situation. this relationship can be seen in japan's post - bubble experience in the late 1980s, the u. s. it bubble in the late 1990s, and the recent subprime mortgage problem. it is difficult to explain these cases by using models derived from standard economic theory. what happened in u. s. financial markets recently was a decline in market liquidity. when this occurs, although sellers of financial products in the market offer prices, no one is willing to buy at those prices, resulting in a drastic shrinkage of market transactions. as a result, market participants are unable to take or hedge risks, and this in turn negatively affects economic activity. unfortunately, there is no perfect explanation of why this complex phenomenon occurs. this makes it all the more important for central banks to continue their efforts to steadily gather and analyze a wide range of data, including information relating to both economic activity and financial conditions as well as information at both the macro - and micro - economic levels, and to update the analysis as new information comes in. i think, while the variety of knowledge and experience accumulated within central banks should be fully