Global structural changes in recent years influence not only central bank policies such as monetary and prudential policies, but also central bank operations such as the issuance of currency and the operation of payment and settlement systems, which
provide basis for the conduct of central bank policies.

As these changes span a wide range of areas, I think it is helpful to briefly outline recent changes in the global economic and financial environment, especially which are deemed important for central banks.

In recent years, the global economic and financial environment surrounding central banks has changed significantly. Global trade activity has gathered strength again following years of lackluster growth in the wake of the Global Financial Crisis. Against the backdrop of the favorable global economic environment, investment activity by financial institutions and other investors around the world has become increasingly active. Along with these developments, economic and financial linkages between countries have been strengthening.

This increased interconnectedness is, of course, desirable for the global economy, as it reflects ongoing globalization. But at the same time, partly due to the recent dynamics of political economy and geopolitics, the size of global shocks has been increasing, and the spread of global economic shocks has been presenting a great challenge for central banks.

Regarding the conduct of monetary policy, changes in price and wage dynamics have attracted keen attention in both academia and central banks, especially those in advanced economies. As the adverse effects from the Global Financial Crisis subside, the unemployment rate has dropped in many countries and the real economy has improved substantially, partly due to the effects of large-scale macroeconomic policies.

Despite these improvements in the real economy, prices and wages have remained sluggish. This phenomenon has recently been labeled the "missing inflation" or "missing wage inflation" puzzle. Looking back on the discussions at our conference last year, adaptive elements in inflation expectations formation were highlighted as a possible factor behind the missing inflation. It is urgent that we explore the mechanism behind the changes in price and wage dynamics especially in advanced economies.

Turning to the financial system, after ten years since the outbreak of the Global Financial Crisis, the robustness of the global financial system has been enhanced through the efforts of financial authorities, which include the finalization of Basel III, and those of financial institutions to strengthen their risk management practice. However, it is necessary to pay attention to developments in the so-called shadow banking sector, which is not sufficiently covered by conventional supervision and regulations. Moreover, in recent years, the low profitability of financial institutions, especially in advanced economies, has come to pose a new challenge for global financial stability. As such, central banks are faced with new challenges in terms of financial stability as well.

From a longer perspective, central banks are faced with an important challenge posed by innovations in information and communication technology. We see remarkable progress in a wide range of technologies, such as artificial intelligence, big data analysis, and distributed ledger technology. We also see the rapid development of smartphones, social network services, and e-commerce. The application of these technologies in the field of financial business, typically dubbed "FinTech," has already brought about drastic changes in the way payments are made in many countries. These developments are expected to continue in the future, promoting further changes in business models at financial institutions.

Of course, over the past several decades, central banks -- in their role as the "bank of banks" -- have made various efforts to improve the safety and efficiency of payment and settlement systems, for example by introducing real-time gross settlement, simultaneous settlement of funds and securities, and simultaneous foreign exchange settlement. Furthermore, with regard to currency issuance, a fundamental role of central banks, some central banks are now exploring the possibility of issuing central bank digital currency. Thus, in the long-run, an era of major transformation may lie ahead even in the core operations of central banking, such as the "issuer of banknotes" and the "bank of banks."

In sum, central banks are facing new challenges both in terms of policies and operations as a result of wide-ranging structural changes in the global economic and financial environment.

By Haruhiko Kuroda

Governor of the Bank of Japan.