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US can learn from Japan, former bank governor says

Japan’s economic experiences in the past two decades can teach the United States and other countries to be humble, avoid bubbles and be prepared for demographic change, a former governor of the Bank of Japan said Thursday.

Masaaki Shirakawa, who served as the governor of the Bank of Japan from 2008 to 2013, discussed the Japanese economy and lessons the United States can learn at UC San Diego’s Economic Roundtable Lecture Series.

The Bank of Japan deployed measures that were “effective at avoiding financial instability,” including a massive increase in the central bank balance sheet, purchase of risk assets and forward guidance. Those measures also limited the effectiveness in restoring economic recovery, he said.

Foreign countries may not learn from Japan’s past because its experience is “often treated as an event unique to Japan or a case of simple policy failures,” Shirakawa said. He added that the experience in Japan has similarities to other advanced economies and some unique features.

Foreign countries can learn to be humble, avoid a bubble, prepare for demographic change and take “context” and “social contract” into consideration.

The typical mindset is to think, “This time is different” or “We are different,” he said.

“It’s quite difficult to fully understand the problem before people actually face it,” Shirakawa said.

New problems emerge in different crises, including bubbles, then a financial crisis after the bubble and then a demographic change.

Having explained the first lesson, Shirakawa said it’s important to avoid a bubble — which he later told an audience member may not be possible.

“The impact of the burst of a bubble is enormous,” Shirakawa said. “A decline in growth rate after the bursting of a bubble is a universal phenomenon.”

Weak growth is the result of deleveraging or balance sheet adjustment, loss of confidence and general uncertainty, and adverse social, political and economic dynamics, he said.

Japan is facing a declining working-age population, and sooner or later other countries will face the same issue, Shirakawa said. It can cause a decline in production capacity, a change in expenditure pattern due to a growing share of the elderly, and a bias of policy adopted due to a growing share of the elderly in voting, he said.

When drawing lessons from Japan’s past, it’s important to look at context and social contract, Shirakawa said. Each country has its own social contract — Japan has flexibility in wage-setting, a bank-centric financial system and rapid aging. The United States has a developed capital market, “the culture of challenge” and a key reserve currency status.

Japan’s average growth rate of real GDP is below average when compared to the United States, United Kingdom and the euro area. But the real GDP growth rate per capita is average, and the real GDP growth rate per working-age person is the highest among industrial countries, Shirakawa said.

Productivity is high, which is good for Japanese people, but the fraction of people who can work is shrinking, creating a problem for the Japanese economy, he said.

He addressed whether the past two decades were “lost” in Japan due to declining growth rate. In the 1960s, Japan had a 10 percent growth rate — similar to China today. The growth rate gradually began to decline, slipping to 5.2 percent in the ’70s, 4.4 percent in the ’80s, 1.5 percent in the ’90s and 0.6 percent in the ’00s.

“It’s inevitable for a country with high growth to observe a gradual decline in growth rate,” Shirakawa said.

To talk about two “lost” decades in Japan is “somewhat misleading,” he said. The first decade experienced the aftermath of the bursting bubble, similar to the United States and Europe after 2007. The second decade reflected the consequences of rapid aging and resulting decline in the workforce, Shirakawa said.

A key concept is sustainability, he said, and sustaining a reasonably high growth of per capita income is most important. Efforts are needed in labor force and productivity, and restoring fiscal balance is one of the “crucial elements” of securing sustainability, he said.

The labor participation rate for females has been increasing steadily, but continues to decline for those aged 30-40 due to childbearing. The participation rate for those aged 60-64 — male and female — is increasing, but with a longer life expectancy, there is still room for further increase in labor productivity, Shirakawa said.

Japan’s labor productivity is about 70 percent of that in the United States. There’s a need for outward foreign direct investment; deregulation in the labor market, agriculture, medical and nursing services; an importance of a culture that embraces challenges; and the importance of “economic metabolism,” Shirakawa said.

“People talk about what areas to expand. [We] also have to think about what area to withdraw,” Shirakawa said. “Areas that should be shrinking do not shrink.”

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