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

fiscal balance and created an environment in which consumers and businesses can plan for a longer term. sound monetary policies have also been instrumental in supporting growth. • strong and transparent institutional framework. an institutional environment in which contracts can be enforced and property rights can be established promotes economic growth. increasingly, all european countries share such an institutional environment. however, the transparency international rates the nordic countries in the top ten at to the transparency and integrity of their public sector. 6 5. the importance of education and research and development so, good policies, sound institutions and some luck go far in explaining the strong performance of the nordic countries. however, by digging a bit deeper, we can see also the for a more comprehensive assessment of the strengths and weaknesses of the " scandinavian model ", see e. g. chapter 4 in the eeag report on the european economy 2007, prepared by the european economic advisory group at cesifo. for instance, denmark and finland shared the top ranking, and all the nordic model countries were in the top ten, in transparency international's 2007 corruption perception index that looks at perceptions of public sector corruption in 180 countries and territories. see : http : / / www. transparency. org / policy _ research / surveys _ indices / cpi / 2007 crucial role of education and investments in r & d. the nordic countries share a long - tradition of emphasising the importance of education. nordic countries, particularly sweden and finland have high public and private spending on research and development, comparable with that of the united states. the particular character here is a close partnership between public and private sector. this has also fostered innovation in the environment of an open economy. oecd has recently publicized a third so called pisa - study. finland has performed well in all three studies. it was emphasized in the study that good performance in finland did not differ between the regions and correlated less with family background than in most countries. in a small country it is important to get all the talent resources in efficient use. the education is here the main tool. nowadays, the share of the working age population with upper - secondary education, as well as tertiary education, is considerably higher in the nordic countries than in the other eu countries on average. moreover, the participation rates for non - formal job - related continuing education and training are exceptionally high in the nordic countries. 7 the nordic economies have benefited from a well - educated labour force. the skilled labour force has contributed to a rapid diffusion of information and communication technologies,