concept that consolidates individual prices of various goods and services traded in a country. in other words, the levels of individual prices can be evaluated against the general price level as a yardstick. in this framework, price stability means that this yardstick is reliable. if so, changes in consumer preferences and the progress of technological innovation will be efficiently translated into changes in individual prices. thus, firms will be able to use changes in relative prices as a signal for their future business strategy. from a macroeconomic viewpoint, when the economic environment is continuously changing, stable prices facilitate the smooth reallocation of such resources as labor and capital and also technological innovation in response to, for example, consumer trends, thereby ensuring sound economic growth over the long run. if prices fluctuate considerably and the yardstick becomes unreliable, then the signaling function of individual prices will be greatly weakened. in this case, labor and capital will not be easily transferred to growth industries, and the inefficient allocation of resources will ensue. in addition, an economy with unstable prices will likely experience unstable business cycles. this, in turn, will make it difficult for firms and households to formulate prospects regarding profits and income, which obstructs sound investment activity. thus, if price stability is impaired, the long - term growth rate will decline. furthermore, price fluctuation distorts income distribution. for example, if inflation occurs, those with financial assets which are fixed in nominal terms, such as bank deposits, will see a fall in their real value. conversely, those with financial liabilities will benefit from a reduction in their real value. as a result, inequality between those with assets and those with liabilities will arise. in contrast, if deflation occurs, the reverse inequality will follow. policy objective of the bank of japan as such, price stability lays the foundation for sound economic development from the viewpoint of both efficiency and fairness. the bank of japan has been aiming at price stability that is neither deflationary nor inflationary. it is a mistake to think that the bank is concerned only with inflationary risks. this can be understood from the conduct of monetary policy in the recent period. in february 1999, the bank embarked on drastic monetary easing, namely the zero interest rate policy. and in april, it made clear its firm intent to maintain this policy until deflationary concerns are dispelled. in view of current economic conditions and price developments, japan ’ s economy is judged not

and security policy. so far, there have been no severe functional disruptions in the financial system. but the situation on financial markets has certainly changed : financial conditions are tightening, risk aversion is increasing, and uncertainty is high. the sources of risks have shifted as well. risks in commodity markets, for example, and vulnerabilities with regard to interest rate risk require monitoring. hence, we cannot rule out the possibility that markets are underestimating the impact of geopolitical risks. severe tail events may not be fully reflected in market valuations. fundamental uncertainty is high, and this uncertainty cannot be priced in objectively. sufficient buffers against unexpected losses must be available within the financial system. the relatively good state of the financial system to date is partly the result of expansionary public policies during the pandemic. but the adjustment to geopolitical risks will be different from adjustment to the coronavirus shock. fiscal space and the potential for monetary accommodation will both be more limited going forward. [ 13 ] appropriate micro - and macroprudential buffers thus need to be available within the financial system to account for higher risks and fundamental uncertainty. iii. the financial system needs preparation for a period of accelerated structural change. structural change in the real economy is likely to accelerate in response to the current geopolitical situation. there have been three de - globalisation shocks in a row over the past five years : intensified trade disputes between the us ( united states ) and china ; the coronavirus pandemic, which has exposed vulnerabilities in global value chains ; and, more recently, the russian war against ukraine as well as lockdown measures in china. these shocks are changing the nature of globalisation and of international cooperation, with potentially severe implications for the real economy. one important driver of structural change is climate change. internalizing climate - related externalities requires an adjustment of relative prices. eventually, implicit subsidies to the real economy arising from the underpricing of climate externalities and of energy security need to be withdrawn. moreover, according to the international panel for climate change ( ipcc ), an increase of today ’ s annual investment by a factor of three to six would be needed to limit global warming to 2°c or 1. 5°c. all this places demands on the financial sector. raising funds and allocating them across investment projects is more challenging in a period of structural change and high uncertainty than during tranquil times. and, if the transition