of financial institutions and the central government are not included. the present - day currency system is built on a complex network consisting of the central bank, financial institutions that provide deposit money, and financial markets where financial institutions carry out their activities. therefore, to secure the ease of use of money and its value, maintenance of financial system stability – the stable functioning of financial institutions and financial markets – is essential. failure of one financial institution to meet its payment obligations may lead to problems for other financial institutions that had been expecting the transfer of funds from the troubled institution, and this may lead to a chain reaction of defaults, that is, the materialization of " systemic risk. " in order to prevent the materialization of such systemic risk, central banks may temporarily extend necessary funds to financial institutions facing funds shortages. this is called the " lender of last resort " function of the central bank. in the period from the latter half of the 1990s to the early 2000s, when japan's financial system was in turmoil, the bank extended such emergency loans, the so - called nichigin tokuyu, to financial institutions. this is an example of the central bank assuming the role of lender of last resort. in addition, to prevent the materialization of systemic risk, central banks should always monitor whether activities of financial institutions and the functioning of the payment and settlement system are sound, and provide advice as necessary. to this end, the bank is continually monitoring the situation in financial institutions and in financial markets. the bank also conducts on - site examinations of financial institutions, in which the bank's staff visit the premises of these institutions to examine in detail their financial soundness and risk management. 3. conduct of monetary policy the last item on my list of central banking operations is the conduct of monetary policy, which aims at maintaining stability in the value of the currency, in other words, at maintaining price stability. central banks maintain price stability through controlling the amount of currency they supply and the level of interest rates, that is, the price of money. if the bank supplies abundant funds to the market, the market interest rate – the uncollateralized overnight call rate – will decline, reducing the funding costs of financial institutions. this will influence other interest rates such as those on loans to households and firms. through the change in interest rates, the cost of funds necessary for the economic activities of firms and households will change, and this will stimulate overall economic activity. as a result, this will

settlement position of each financial institution was calculated simultaneously and its account at the bank was credited or debited. with this settlement mode, financial institutions need only the funds equivalent to their net debit positions at the time of settlement, and thus, it is an efficient mode from the viewpoint of the management of liquidity and business operations. under this mode, however, if a single financial institution in the system were to fail to meet its obligations, all payments would inevitably be suspended. in the worst case, this would lead to a chain of defaults at financial institutions. since the total daily value of settlement via the current accounts at the bank is substantial, reaching around 120 trillion yen, the effects of this risk could be grave. in order to reduce such risk, in 2001, the bank converted the designated - time net settlement to a settlement mode in which funds transfers are made immediately and individually. this mode is called " real - time gross settlement ( rtgs ). " in rtgs, each payment instruction sent by financial institutions for a funds transfer through current accounts at the bank is settled immediately and individually upon receipt. therefore, negative effects of one financial institution's failure to pay would be limited to counterparties to that institution and would be minimized for other institutions and the overall settlement system. while this is a considerable advantage, there is an issue specific to rtgs that need to be addressed. namely, it requires financial institutions to prepare larger amounts of intraday liquidity for settlement compared with the designated - time net settlement. in the current rtgs mode, if each and every financial institution holds back its payments until it receives payments from others, there is a possibility that all system participants would end up short of funds and settlements would not be processed ( chart 6 ). if such behavior became widespread, it could lead to gridlock, and smooth settlement, the aim of rtgs, would not be achieved. the breakthrough in addressing this issue was the substantial progress in information processing technology. the bank has been working on the implementation of the nextgeneration rtgs ( rtgs - xg ) project, and is planning to introduce new functions, " queuing and offsetting mechanisms, " into the boj - net funds transfer system in october 2008 [ reference 6 ]. the " queuing mechanism " will place payment instructions in the boj - net central queue. the " offsetting mechanism " will then identify sets of payment instructions in the queue that can be offset simultaneously and settle these