LONDON – Bank of Japan Gov. Masaaki Shirakawa said there are limits to what monetary policy can achieve and governments must implement “necessary” reforms to aid the global economy.

“Providing liquidity as ‘a lender of last resort’ is, in essence, a policy to ‘buy time,’ ” Shirakawa said in a speech late Tuesday at the London School of Economics. “It is essential that the necessary structural reforms take place while time is being bought, as the time that we can buy becomes progressively more expensive.”

As Europe’s debt crisis prolongs the global economy’s recovery from the financial crisis and recession, central banks have followed interest rates to record lows with measures such as bond purchases to boost demand. Shirakawa said that while there’s a risk of “diminishing returns” as loose policy is extended, that doesn’t reduce the need for central banks to act.

Shirakawa said the yen’s strength will “hurt the Japanese economy in the short term.” The central bank lowered its economic assessment for a second straight month in December, while sentiment among large manufacturers, which include major exporters, deteriorated in December from September.

“The reason the yen is appreciating is because the yen is seen as the least unattractive currency in the financial crisis,” he said in response to questions at the event. “There is some evidence for supporting that kind of perception. In terms of foreign currency funding, Japan is a fortress, Japan is very robust. We are running a surplus on our current account.”

Shirakawa quoted Bank of England Gov. Mervyn King, who attended the event, saying he agreed with King’s comment that there is “a limit to what monetary policy can hope to achieve.” Shirakawa also said central banks must be “attentive to the accumulation of financial imbalances” as well as price stability.

“Needless to say, bubbles are not caused by low interest rates alone,” he said. “However, when the expectation prevails that low rates will continue for a long period of time, it is likely to encourage leverage and maturity mismatching between the assets and liabilities of financial institutions.”

Shirakawa said that the greater the leverage and maturity mismatches are, the more exposed an economy is to a possible unwinding. “The bursting of bubbles is the materialization of such fragility,” he said, adding that the cost of such events is “unbearably enormous.”

The BOJ chief also said the “low growth” in Japan over the past decade was largely due to demographic changes, particularly a “rapid aging” of the population, and he warned other nations may face a similar problem.

“The most significant challenge confronting Japan is how to adjust to a rapid demographic change that is unprecedented in developed countries,” he said. “Given that other developed countries will face the same problems despite some differences in timing and magnitude, the economic effects of demographics deserve further study.”