##j - net is the planned development of the new bojnet system. the current boj - net system went live in 1988 and has been serving the industry with highly reliable and stable operation for more than twenty years. during this period, the environment surrounding the system has gone through significant change, including increasing interconnectedness among payment and settlement infrastructure and globalization of financial markets. the bank believes that the new boj - net system should have the capability to respond to ongoing and future developments in both payment and settlement industry and technologies supporting the industry, and that this should be achieved by migrating to the latest information processing technology, adopting a system architecture with greater flexibility for future changes, and enhancing accessibility from its participants and external systems to the new boj - net systems and services. the bank decided to fully review the configuration of the boj - net system, and last month released the principles guiding development of the new system and the implementation schedule. 10 this was done following a public consultation process, with many valuable opinions received from relevant parties. some of the possible changes under the new bojnet system include ( 1 ) expanding the range of transactions that can use the liquidity - saving features, ( 2 ) facilitating interoperability with other systems – for example, by adopting xmlbased messages – and ( 3 ) improving connectivity with other securities settlement infrastructure. the bank believes that the enhanced boj - net system will underpin the activities of financial institutions in japan as they pursue new opportunities in response to developments in financial markets and services. the bank will continue to closely consult with relevant parties as it develop the detailed functionalities and specifications of the new system. b. oversight of private - sector payment and settlement systems in addition to the operation of boj - net, the bank conducts oversight of private - sector payment and settlement systems. oversight involves monitoring the design and operation of individual systems and encouraging improvements where necessary, with primary focus placed on systems that are systemically important. oversight is widely recognized around the world as a critical function of central banks, although its legal basis may vary from country to country. financial stability, together with price stability, supports sound development of the national economy. central banks have attached importance to their oversight activities to ensure that payment and settlement systems do not become a source of instability, and to lay the foundation for further enhancement of the financial system. one issue that the bank has worked on over the years as part of its oversight activities is preparing arrangements for coping with participant default. in

course, without the integrated financial system, deficit countries would not have been able to maintain the persistently high private and public spending we observed in the decades before the financial crisis. by implication, export - oriented countries accumulated unprecedented amounts of wealth abroad, even though the underlying mechanisms were quite different. naturally, in this global setting, financial innovation went hand in hand with the transfer of huge amounts of funds from surplus to deficit countries. it is important to note that the emergence of current account deficits and surpluses is not bad per se. for an economy with an ageing population, for example, current account surpluses and the associated accumulation of net foreign wealth might well be a reasonable and efficient market outcome as its consumption rate is expected to grow in the future. as long as the global distribution of production and consumption reflects undistorted saving and investment decisions that put capital to the most productive use, it contributes to global growth and prosperity. in the same vein, financial innovation generally has positive effects, as it provides access to high - yield investment projects and thereby allows better risk sharing and lifecycle consumption smoothing. however, we know that in reality both processes have not always functioned that well. the undervaluation of exchange rates due to fixed exchange - rate regimes in some emerging market economies as well as the false perception of wealth which accompanied the emergence of asset price bubbles have distorted the global distribution of production and consumption and caused a build - up of global imbalances. in addition, the financial crisis has revealed serious deficiencies in the process of financial innovation and international risk sharing, which were not only harmful and inefficient per se but also further promoted the build - up of global imbalances. instead of reducing risk and increasing transparency, the process of global capital transfer via highly structured products encouraged savers to accumulate more risk than they were aware of and than they could afford, which in turn reduced borrowers ’ discipline rather than ensuring it. the paper by mendoza and his co - author “ financial innovation, the discovery of risk and the us credit crisis ” presented at this conference sheds light on the underlying mechanism by which insufficient knowledge about the true riskiness of the financial environment – which was, as we know today, the rule rather than the exception in the years preceding the financial crisis – can lead to a period of over - optimism in the financial markets. in this situation, investors are inclined to underestimate the deterioration of economic fundamentals and to over - borrow. the following read