Structural reform ‘indispensable’ for economic recovery: BOJ’s Shirakawa

by Shinya Ajima

Kyodo News

WASHINGTON — Bank of Japan Governor Masaaki Shirakawa on Sunday called for the Japanese government to promote structural reforms to ensure an economic recovery, without making pointed reference to it after the central bank played its part by significantly easing the country’s monetary conditions.

Shirakawa, delivering a speech in Washington after attending a series of international meetings over the weekend, also warned that enhanced monetary easing in developed countries could create a bubble in emerging economies by triggering a shift in capital flows.

He clearly stated that easy monetary policy alone cannot solve every problem.

“Structural reform is indispensable,” Shirakawa told an annual gathering of the Institute of International Finance Inc., the global association of financial institutions, suggesting that the reform can help boost productivity growth through such development as the shakeout of insufficient businesses and rejuvenation of the economy.

The BOJ announced last week a fresh round of monetary easing to sustain Japan’s economic recovery, including a surprising cut in its key short-term interest rate to a range of zero to 0.1 percent, as well as the establishment of a program to boost liquidity in the economy through the purchase of such assets as government securities and corporate bonds.

The move came as the government and both ruling and opposition lawmakers exerted pressure on the central bank to do more in fighting the country’s persistent deflation and the impact of the recent sharp rise of the yen, which has adversely impacted Japan’s export-led recovery.

Shirakawa’s call for structural reforms were apparently aimed at the government, which now struggles to prop up the economy with a series of reform initiatives, including support for environmental and energy industries, as well as others also with growth potential, such as medical and nursery care.

He also warned that the ongoing unprecedented monetary easing in Japan, the United States and Europe, if kept in position for a prolonged period, would produce “unintended consequences.”

The BOJ head underlined that current strong growth in emerging economies seems affected by lower interest rates in developed economies, which have brought about stimulation through capital outflows to such emerging economies as China and South Korea.

“If the strong growth in emerging countries turns out to be the one entailing the bubble-like nature, advanced countries as well as emerging countries themselves will be affected significantly,” Shirakawa said.

He attended Friday a Group of Seven meeting, in which central bank governors and finance ministers from majored developed countries agreed that they will promote cooperation in pushing emerging nations with huge current account surpluses to press for necessary reforms and stop undervaluing their currencies in order to keep their exports competitive.