##irable. if economic swings amplify significantly, there could be adverse effects, such as inefficient resource allocation. the bank may then be rushed into tightening its monetary policy, possibly resulting in an interruption in the course of the reversal of hysteresis. in this situation, prices might rise in the short run, but this will not be stable over the long run. in realizing the reversal of hysteresis, focus should not be placed solely on tightening the output gap, but rather on maintaining moderately tight supply - demand conditions for as long as possible. hall ( 2014 ) expresses the view that the extent to which and the time required for hysteresis to be dissipated differs for each element of the supply side of the economy, whether it is tfp, capital accumulation, unemployment, or the labor force participation rate. kocherlakota ( 2014 ) - expressing agreement with hall's view - - notes that much of the hysteresis can be reversed ultimately, referring to the fact that hysteresis resulting from the great depression was eliminated under vigorous demand during world war ii. second, it is also necessary to pay due attention to the stability of the financial system. in an environment where accommodative financial conditions have been maintained over a long period, the risk of an accumulation of financial imbalances will be heightened. according to the bank's assessment presented in the april 2018 financial system report, although japan's financial system as a whole is not showing any signs of overheating, some indicators, such as the lending attitudes of financial institutions, are very close to a state of overheating. furthermore, if the low interest rate environment continues and downward pressure on financial institutions'profits becomes prolonged, the functioning of financial intermediation may be undermined. under the " yield curve control, " which the bank adopts as one of its policy tools, as inflation expectations rise and the long - term growth potential of the economy strengthens in accordance with the reversal of hysteresis, monetary easing effects will be enhanced through a rise in the natural rate of interest and a decline in real interest rates. 7 when conducting monetary policy in the future, the bank - - while taking account of the changes in the external environment - - should consider without prejudgment the most appropriate policy so as to avoid any serious distortion in the economic and financial environment. upward pressure on wages and prices can be increased by appropriately addressing

the holistic review, i have evaluated the board ’ s stress testing framework. in particular, i have considered whether the proposed changes to the riskbased capital framework should prompt adjustments to stress testing, and whether there are ways the stress test can be improved to make it a more effective test of banks ’ resilience. i have concluded that the framework for stress testing generally remains sound, but that we should review our global market shock and the stress test ’ s approach to estimating operational risk so that they provide a complementary lens to our risk - based standards on market risk and operational risk, respectively. banks have raised concerns that the changes to the risk - based capital framework i described earlier, combined with the stress test, result in a “ double counting ” of risk that - 11 - is already captured in the minimum requirements. conceptually, this shouldn ’ t be the case, as the changes in the risk - based capital requirements affect the way that minimum capital requirements are calculated, and the stress test is used to calculate the buffer. but we will seek comments on all elements of the proposed risk - based capital adjustments, including whether interaction with the stress test results in an inappropriate treatment. fourteen years of stress testing, and the real - life surprises during that time, including the pandemic and the bank stresses this spring, have made it clear that stress tests need to be stressful to adequately prepare banks for unanticipated events. a key strength of stress testing is its ability to be responsive to the rapidly changing conditions by testing bank resilience to emerging or growing risks. in addition, stress testing can be used to assess banks ’ resilience to different kinds of stress in the financial system. for example, we have long known — and the recent experience with svb reinforced — the importance of banks ’ resilience to funding stress. the stress test should evolve to better capture the range of salient risks that banks face. in addition, the board could use a range of exploratory scenarios to assess banks ’ resilience to an evolving set of risks and use the results to inform supervision. minimal adjustments to the g - sib surcharge to improve precision as part of the holistic review, i have evaluated whether the proposed changes to the risk - based capital framework should prompt revisions to the g - sib surcharge. i am not recommending fundamental changes to the underlying framework at this time, but i will be recommending a series of