. iii. demographics and domestic demand : japan ’ s experience japan is in the midst of dealing with some significant demographic challenges of an ageing population and a decline in the overall size of the population. in asia, china and korea are next in line to phase out of demographic dividend into demographic onus. thailand is not far behind. let me talk about the experience of japan. the transition from demographic dividend to demographic onus brings with it a series of problems. perhaps the most pressing of these problems are a decline in the potential growth rate, a deterioration in the fiscal balance, and intergenerational income transfers. these problems put downward pressure on the growth of domestic demand. in japan, the potential growth rate has been pushed down by a decline in labor input. there are two reasons for this decline. first, the number of workers has declined due to demographic changes. second, working hours have become shorter as the economy has matured. firms ’ slow response to demographic changes has contributed to sluggish growth in aggregate capacity to supply goods and services that reflect the changing environment. the demographic onus has also led to deterioration in fiscal deficits, impairing the pension and health - care insurance systems. delays in reforms to these social security systems have increased the burden on future generations and raised the issue of intergenerational income transfers. there has been a growing consensus in japan that greater efforts are needed to address the adverse effects of demographic changes. these efforts are expected to provide new growth momentum for japan ’ s economy. for example, there has been progress in initiatives to raise the labor participation rate of women and the elderly, to address the decline in the number of workers. there have also been initiatives to attract more highly - skilled foreign workers. firms are also making headway in areas such as retail, tourism, medical and nursing services in an effort to provide goods and services for the elderly and families with small children. while demographic changes can be predicted quite accurately, reversing them is extremely difficult. however, as is often the case when problems seem too serious or difficult, initiatives bis central bankers ’ speeches to address those problems tend to be put off. although japan ’ s working - age population started to decline in the mid - 1990s, concrete action was taken only after the total population started to decline in the latter half of the 2000s. japan ’ s experience thus suggests that it is crucial not only to debate the challenges posed by the demographic onus, but also to

stability, which buys time for this adjustment to continue. completing the euro area ’ s institutional architecture to stabilise emu over the long - term, however, requires a more fundamental reform of the institutional architecture. the minimalist approach pursued at maastricht was found to be inadequate in the context of highly integrated financial markets. in recognition of this, the presidents of the european council, commission, eurogroup and ecb have been asked to lay out a roadmap to complete emu over the next decade. they presented their interim report to the european council in july and will present a final version in december this report does not aim to identify what features we would ideally like for the euro area, but rather what features it cannot do without. having been thoroughly stress - tested over the last three years, we now have a much clearer idea of what rules and institutions are essential for monetary union to function effectively. in the view of the four presidents, a stable emu needs to be built on four pillars : financial union, fiscal union, economic union and political union. let me explain each in turn. financial union the first and most urgent pillar is financial union or, as it is more commonly known, banking union. bearing in mind what we have learned about the importance of financial markets in a highly integrated monetary union, taking measures to ensure a stable and well - ordered financial system in the euro area has to be our first priority. what does this imply in practical terms? first of all, a single supervisory mechanism for banks. as i outlined above, a single financial market combined with national supervision is not sustainable. before the crisis, it led to a lack of oversight of cross - border activity. since then, it has facilitated a retrenchment of bank lending behind national borders. a single system of supervision can reduce these risks by allowing for an aggregated view of the euro area financial market ; by providing a safeguard against regulatory capture ; and by ensuring that national interests are not put ahead of the european interest. with this in mind, the commission has presented a proposal for the establishment of a single supervisory mechanism, entrusting the ecb with specific supervisory tasks. this is a welcome development and the ecb is ready to assume these tasks. however, it is essential for the credibility of supervision, and for the ecb ’ s reputation, that the legal framework allows us to implement these tasks in an effective and rigorous way. another necessary principle, as i have argued elsewhere,