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Policy makers in the U.S. and Europe should take heed of the sort of demographic trends that hampered Japan's economic growth in the first decade of this century, Bank of Japan Gov. Masaaki Shirakawa said Tuesday.
In a speech focused on the similarities between Western economies' current funk and the "two lost decades" of weak growth Japan experienced in the 1990s and 2000s, Shirakawa said policy makers in the U.S. and Europe now face problems familiar to their Japanese counterparts, including ageing populations. An elderly population led to Japan's second decade of stagnation, Shirakawa said.
The central bank governor told an audience at the London School of Economics that Western policy makers underestimated the scale of the financial crisis they faced following the bursting of a real estate bubble in 2007.
Like the Bank of Japan before them, Western central banks have responded by cutting interest rates to near zero and massively expanding their balance sheets.
"Central banks act similarly when confronting similar problems," Shirakawa said. But he added the U.S. and Europe now face a similar weakening in the effectiveness of traditional monetary policy that Japan grappled with during its lost decades.
Central banks can only buy time for governments to enact economic reforms, Shirakawa said. And any time bought gets "progressively more expensive," he said.
Shirakawa said policy makers must in future be more vigilant about the build-up of risks in the financial system. Delivering stable growth and inflation can encourage greater risk-taking that can, paradoxically, heighten instability in financial systems, he said. They most also take account of the global consequences of their policies, he added.
During questions from the audience, Shirakawa remarked that the yen is gaining against its peers largely because it is the least unattractive major currency.
-By Jason Douglas and Geoffrey T. Smith, Dow Jones Newswires; 44-20-7842-9272; jason.douglas@dowjones.com
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