arbitrage between instruments and between markets. if a clear arbitrage opportunity is left unexploited, someone is most likely to take advantage of that opportunity to gain profits, thereby bringing about a price correction. assuming the presence of private economic agents in pursuit of profits, this understanding is quite reasonable. of course, this understanding is based on the following strong premises : ( 1 ) investors behave rationally, and ( 2 ) information that would affect prices becomes available instantly and there is no information disparity in the markets. therefore, it is not difficult to find cases where this understanding is not applicable in reality. however, i feel that this theory is significant in that it provides the basic perspectives for the functioning of financial markets. supposing that an arbitrage opportunity is apparently present, the theory would be the basis for discussions on issues such as why that occurred, whether the market is just taking time to adapt and adjust and an autonomous adjustment can be expected, and whether the situation should be artificially corrected by implementing some sort of measures. ii. mutual feedback with the actual markets the significance of traditional theory on financial markets is generally accepted not only in academia, but also among many market participants. however, as i have mentioned, there are quite a few phenomena in actual financial markets for which such theory might not provide a satisfactory explanation. it is believed these difficulties are attributable to various factors ; three of which i will explain now. difficulties in utilization of market data practical hurdles are one of the factors that make it difficult for traditional theory to be fully adopted. in relation to asset prices, there often are constraints in utilizing data in practice. specifically, expected inflation rates and term premiums included in long - term interest rates are not directly observable, even though they are widely accepted concepts. estimated figures should be seen with a considerable margin as there is no consensus on modeling and formulation. in addition, there are cases where data availability is a high hurdle in practice. apart from data that are not observable, which i have just described, there are those that are not collected, those that are regarded as private information and are not for general use, and those that are hidden and therefore their usefulness is not known. on this point, it should be noted that, against the background of the evolution of information processing technology such as natural language processing, image recognition, and machine learning, as well as improvements in the performance of computers, a trend towards utilizing

framework there were two major challenges to monetary policy in japan. to start with, despite unprecedentedly large - scale monetary easing, inflation expectation formation in japan is still adaptive to a large extent. that is, the expectations are formed in a backward - looking manner. in the wake of the substantial decline in crude oil prices since summer 2014, a reduction in the observed inflation has pushed down inflation expectations. the first challenge, therefore, is in terms of how to lift inflation expectations that had fallen once to an undesirably low level and re - anchor them at the target of 2 percent. the next issue concerns the link between the interest rate level and the effects of monetary easing. when short - and long - term interest rates were well in positive territory, a common understanding was that, so far as the impact on the economy was concerned, the lower the interest rates, the greater the monetary easing effects. however, it is now recognized that, when short - term interest rates are negative and long - term interest rates have fallen to extremely low levels, there could be side effects or costs that weaken the functioning of financial intermediation, which may reduce monetary easing effects. such observations lead us to the other challenge, which is to explore optimal levels and shapes of the yield curve that can maximize monetary easing effects on the economy and prices. as solutions to these challenges, the bank recently introduced the new monetary policy framework " qqe with yield curve control. " this consists of two major components : ( 1 ) an inflation - overshooting commitment and ( 2 ) yield curve control. let me talk about each of these in turn. ii. inflation - overshooting commitment i will start by talking about the inflation - overshooting commitment. there is a widespread consensus that anchoring inflation expectations is very important in achieving a price stability target set by the central bank. however, it has not been fully analysed, either theoretically or empirically, how inflation expectations are formed by the public and how they can be raised once they have been de - anchored and fallen to an undesirably low level. qqe introduced by the bank in 2013 aimed at changing people's perceptions of inflation through a regime shift in monetary policy by combining a strong commitment to achieving the price stability target and the significant expansion of the monetary base. as shown in the " comprehensive assessment, " this approach has produced positive results. in light of these achievements, the bank of japan further strengthened this approach recently with