rates. by increasing the potential for profitable investment opportunities, and by reducing the need for precautionary savings, such measures would raise the equilibrium real rate, all things being equal. why the objective should be symmetric all this justifies the level of our inflation objective in the steady state. but it is equally important that we pursue our objective symmetrically. monetary policy operates to a large extent by guiding expectations, a process which sets in motion a series of automatic stabilisers in the economy. for instance, if markets expect central banks to react to negative shocks by increasing monetary accommodation, when a shock actually happens, it will immediately lead to lower real interest rates as the central bank ’ s reaction function is taken into account. that will in turn result in higher consumption and investment, which helps offset the initial shock. this mechanism hinges crucially on the central bank being credible on both sides – being just as committed to fighting too low inflation as too high inflation. and while this is true generally, it is all the more so in the special circumstances we face coming out of the crisis – namely, where private debt stocks are high and policy interest rates are close see evaluation of the ecb ’ s monetary policy strategy. coenen, g. ( 2003 ), “ zero lower bound : is it a problem in the euro area? ”, ecb working paper series no 269, september 2003. see evaluation of the ecb ’ s monetary policy strategy. see draghi, m. ( 2016 ), “ addressing the causes of low interest rates ”, introductory speech held at a panel on “ the future of financial markets : a changing view of asia ” at the annual meeting of the asian development bank, frankfurt am main, 2 may 2016 bis central bankers ’ speeches to the lower bound. in those conditions, any perception that the central bank might tolerate persistent downward inflation misses would be especially costly. it would lead first of all to a dis - anchoring of inflation expectations, which would cause real yields to rise mechanically. this would be contractionary and could not be offset by lowering policy rates even further. and with fixed nominal debts, lower inflation would trigger redistribution from borrowers to creditors, which would prolong the debt overhang and exacerbate the contraction due to the different propensities to consume and invest of those two groups. this is not an argument for raising inflation targets, as that would only create redistribution in the other direction. but it is an argument for central banks to

stability target and its actions to work on inflation expectations through that commitment. to begin with, if we look into the causes of japan ’ s price declines, various factors have had an effect at each point in time. to name several, these were an adjustment of excess capacity and employment after the bubble period, low - priced imports from emerging economies and firms ’ low - price strategies, financial institutions ’ nonperforming loan problems and financial system uneasiness, and an excessive appreciation of the yen. as actual prices declined due to those factors, deflationary expectations that prices will not rise but instead decline were generated among people. subsequently, even if those factors that induced price declines diminished, once deflationary expectations became entrenched, people would make decisions and take actions on the assumption that prices would not rise. through this process, deflationary expectations themselves created in a self - fulfilling manner an economy in which prices did not easily rise. explained by using the jargon of economics, japan ’ s economy is in a situation in which the phillips curve, which expresses a negative relationship between inflation and unemployment, has shifted downward due to a decline in people ’ s inflation expectations. even when the economy is trapped in such a situation, we can raise prices temporarily by rejuvenating economic activity through stimulative policies. however, if the phillips curve remains shifted downward, the economy will eventually return to a deflationary state once economic activity declines over the business cycle. this is why japan ’ s economy could not overcome deflation after all, despite experiencing an economic expansion several times while deflation was continuing. having analyzed why protracted deflation occurs, let ’ s turn to the second question : what is required to get out of protracted deflation and achieve the 2 percent price stability target in a sustainable manner? as the problem lies in the fact that people have a deflationary sentiment that prices will fall, we have to dispel such sentiment. we have to convince people that a situation in which prices will increase by around 2 percent every year is nothing special, and change the economy to one in which people make decisions and behave based on that assumption. in other words, it is necessary to raise people ’ s expected rates of inflation to 2 percent and re - anchor them at that level. the bank had repeatedly implemented various leading - edge policies. while a series of such policies stimulated economic activity, they fell short of showing a strong and clear commitment to achieve the price