masaaki shirakawa : globalization and population aging – challenges facing japan speech by mr masaaki shirakawa, governor of the bank of japan, to the board of councillors of nippon keidanren ( japan business federation ), tokyo, 22 december 2011. * * * introduction i am honored to have this opportunity to address the representatives of japan ’ s economy gathered here today. we have just over a week left in a year in which the most notable event for our nation was definitely the great east japan earthquake of march 11. speaking only about the economic impact of this terrible event, japan ’ s economy suddenly faced enormous downward pressures arising from damage to production facilities, disruptions in supply chains, and shortages in electricity supply. thanks to tremendous efforts by company managers and by employees in the field, these supply - side problems were resolved by the summer, which was faster than expected. however, just as the prospects gradually began to look good for japan ’ s economy to overcome the problems caused by the disaster, the sovereign debt crisis in europe triggered new problems – a slowdown in overseas economies and the appreciation of the yen. as a result, after a sharp rebound, the pick - up in japan ’ s economic activity has gradually slowed and is currently at a pause. according to the tankan ( short - term economic survey of enterprises in japan ) released last week, business conditions deteriorated for large manufacturing enterprises, as has been extensively reported in the newspapers, but improved for large nonmanufacturing enterprises ( chart 1 ). as for smes, business conditions improved both for manufacturing and nonmanufacturing enterprises. as such, although overall business conditions have improved, the pace of improvement has slowed. as can be seen from the results of the tankan, there are currently two opposing forces in operation : on one hand, exports and production remain more or less flat due to a slowdown in overseas economies and the appreciation of the yen ; on the other, in terms of domestic demand, private consumption remains firm and postearthquake rebuilding and reconstruction demand is expected to materialize. the bank of japan judges that japan ’ s economy will be more or less flat for the time being as the former force prevails. beyond that phase, it is our judgment that the economy will gradually return to a moderate recovery path, reflecting a pick - up in growth of overseas economies, especially emerging economies. having said that, we are fully aware that this outlook is attended by various uncertain

unprecedented economic bubble in the late 1980s. the effects of that bubble were considerable. prior to the lehman shock, an optimistic view prevailed among economists and policy authorities in the united states – that a significant economic downturn following a bubble period could be avoided through implementation of powerful monetary and fiscal policies once the bubble burst. that optimistic view is no longer prevalent today. economic activity remains stagnant until excesses in production capacity and debt that have been built up during a bubble period are resolved ( chart 5 ). such balance - sheet adjustments, however, no longer acted as constraints on japan ’ s economy at least by sometime between 2003 and 2004. the more essential reason for the subsequent downturn in japan ’ s economy was japan ’ s delayed response to the significant changes in the environment, namely, globalization and population aging. going back to my earlier reference to 1995, japan around that time was desperately looking for ways to recover from the collapse of the bubble economy. at that stage, i recall that not many of us understood the significance of globalization and population aging for japan ’ s economy as well as we later came to realize. in other words, it is better to attribute the delay in responding to an inability to fully recognize the seriousness of the problem itself than to difficulties implementing solutions despite knowing what they were. i believe the same could happen in the next 15 years ( chart 6 ). for instance, how will japan ’ s rapid population aging alter the course of japan ’ s future economic growth and fiscal conditions? will japan ’ s economy be able to maintain its longstanding current account surplus? ii. setting the agenda for japan ’ s economy serious consequences of leaving situation unchanged regarding the first question, even if we focus on demographics, which are relatively easy to predict going forward, we can confirm that the conditions that the underlying factors affecting japan ’ s growth are going to change dramatically. the average growth rate has declined from 4. 3 percent in the 1980s to 1. 5 percent in the 1990s and further to less than 1 percent in the 2000s ( chart 7 ). the economic growth rate consists of two components : the rate of growth in the number of workers and the rate of growth in labor productivity, which represents an increase in the value added by each worker. we can project future growth rates by forecasting these two components. of the two, the rate of growth in the number of workers started to decline in the 2000s, and decreased at an annual rate of 0. 3 percent on average during that decade