in a state of equilibrium. that is why it has been also called “ deflationary equilibrium. ” it can be said that deflationary equilibrium has become protracted and become increasingly difficult to overcome precisely because it has been stable. however, such state of equilibrium will not continue forever. above all, one cannot expect the long - term development of japan ’ s economy in the absence of firms ’ active efforts to create new businesses. for the sake of the future of japan ’ s economy, it is critical to overcome deflation at the earliest possible time and convert “ bad and shrinking equilibrium ” to “ good and expanding equilibrium. ” ii. ideas behind qqe – drastic change in expectations then, how can the economy overcome deflation? the bank ’ s answer to this question was nothing but the qqe introduced in april. as mentioned earlier, the essence of deflation is in that taking action on the assumption that prices will not increase has been rational for both firms and households. to get out of such “ deflationary equilibrium, ” the economic environment needs to be changed so that taking action on the assumption that prices will moderately increase becomes a better option. under deflation due to a “ fallacy of composition, ” raising prices and wages by only one firm will be a disadvantage. as many firms raising prices and wages simultaneously will have a positive effect on the economy as a whole, the policy authorities have to come up with bold policy measures that enable firms to change their mindset in such a manner. in sum, there is a need to change the rules of the game that prevailed in the “ deflationary equilibrium. ” to that end, the bank is strongly and clearly committed to achieving the price stability target of 2 percent cpi inflation rate at the earliest possible time, with a time horizon of about two years. besides, to underpin the strong and clear commitment, the bank has decided to enter a new phase of bold monetary easing both in terms of quantity and quality ( chart 11 ). furthermore, the bank is also committed to continuing with the qqe as long as it is necessary to maintain the 2 percent target in a stable manner. in the process, the bank will examine both upside and downside risks to economic activity and prices, and make appropriate adjustments. the bank is totally committed to achieving the 2 percent price stability target. bis central bankers ’ speeches as specific measures for monetary easing, the bank will purchase jgbs so that their holdings will increase at

a whole : that state is called a “ fallacy of composition ” or a “ coordination failure ” in terms in economics. japan ’ s deflation since the latter half of the 1990s is a typical example of that. let us confirm that point in terms of macroeconomic indicators since the 1990s. nominal gdp and nominal employee income have not been able to get out of the long - term downtrend since their peaks in 1997 ( chart 4 ). namely, amid deflation, japan ’ s economic activity on a nominal basis has been consistently contracting. such situation is quite rare among advanced economies. in the united states, nominal gdp and nominal employee income have maintained long - term growth trends, albeit a temporary decline due to the lehman crisis. japanese firms have been in a situation in which they have not been able to pass the costs related to production on to sale prices because of intensified competition ( chart 5 ). as for price conditions in the tankan survey, since the latter half of the 1990s, the diffusion index of output prices has been consistently lower than that of input prices. as a reason for the difficulty in price pass - through, many firms have pointed out severity in price competition with rival firms, thus suggesting that the “ fallacy of composition ” or the “ coordination failure ” might have been taking place. at the same time, firms ’ medium - to longterm growth expectations have been on a declining trend for a protracted period since the 1990s ( chart 6 ). furthermore, the fact that the expected growth rate on a nominal basis was lower than that on a real basis even when corporate profits increased substantially in the mid - 2000s tells us how persistent deflationary expectations were. also viewed from the financial side, protracted deflation has deprived japan ’ s economy of vitality. first, when deflationary expectations were embedded, real interest rates obtained by subtracting the expected rates of inflation from nominal interest rates remained high ( chart 7 ). what matters for firms ’ decision - making in business fixed investment is developments in not nominal but real interest rates. even though nominal interest rates decline, if prices are expected to decline as a trend, investment cost on a real basis will remain high and incentive for business fixed investment will wane. in order for firms to transform innovative ideas into actual technologies and products, it is necessary to introduce new machines and build new factories. the fact that real interest rates remained high amid deflation has deprived firms of incentive to make growth - enhancing investment