haruhiko kuroda : asia ’ s contribution to the global economy – prospects and challenges for the transition to domestic demand - led growth speech by mr haruhiko kuroda, governor of the bank of japan, at the 4th bank of thailand policy forum, bangkok, 24 july 2014. * 1. * * introduction governor, distinguished guests, ladies and gentlemen, thank you for inviting me to the 4th bank of thailand policy forum. it is a great honor to address such distinguished guests who are leading the thai economy. i would like to extend my heartfelt gratitude to governor prasarn trairatvorakul for giving me this valuable opportunity. thailand was the first southeast asian nation to establish diplomatic relations with japan, and the year 2017 will mark the 130th anniversary of this significant event. the two countries have been engaged in active cultural exchange at least since the ayutthaya dynasty. in more recent years, our two nations have established close ties as important economic partners, providing support to each other in times of difficulty. the bank of japan received generous donations from the bank of thailand and the bank ’ s staff to help the victims of the great east japan earthquake in 2011. all of us at the bank of japan remain deeply grateful for this kindness. i learned about these donations immediately after i became governor of the bank and felt deep reverence for and strong gratitude to our friends in thailand. i would like to take this opportunity to renew our thanks. thailand is a key base in southeast asia for the economic activities of japanese firms, of which more than 1, 500 are members of the japanese chamber of commerce in bangkok. last year, japan was thailand ’ s largest importing trade partner, and its third largest export destination. the very close ties between the two countries are shown in the results of a survey conducted by the ministry of foreign affairs of japan, where 97 percent of the people in thailand regarded japan as a friendly nation. today, i would like to share with you my views on asia ’ s contribution to global economy. these views are based on my 16 months ’ experience as governor of the bank of japan, and my 8 years as president of the asian development bank before that. i. a change in growth model for the asian economies even when growth in the major advanced economies slowed considerably following the global financial crisis, the asian economies continued to register solid growth. moreover, the region ’ s economies have contributed significantly to the recovery and subsequent growth of the global economy.

take the necessary action at an early stage. prompt action is needed to preserve the growth momentum of the domestic demand - led economy in asia. iv. global monetary accommodation and domestic credit growth high economic growth is often associated with an increase in domestic credit. the current growth in domestic demand in asian economies is mainly driven by domestic structural factors such as the increase in the middle consumer class. but, it has also been reinforced by a combination of global monetary accommodation and the concomitant expansion in domestic credit. history tells us that bubbles often arise when people ’ s expectations become bullish due to the experience of continued high growth and domestic demand expansion. examples of such situations where domestic demand growth became excessive and ill - balanced are now all too familiar. we saw this in the bubble economy in japan, in the housing bubble in the united states, and in the overheating in real estate markets in peripheral european countries. these economies eventually fell into financial crises. and the symptoms were common in each case : a rapid increase in credit and an emergence of euphoria based on the belief that the country had entered a new phase. there is also the danger of an unsustainable increase in domestic credit reliant on short - term foreign borrowings. this is due to the lack of deep domestic financial markets. the current global accommodative financial conditions raise the possibility of unhealthy global capital flows into asian economies. such capital flows could result in the build - up of distortions and risks in the financial systems of these economies. for example, several economies have seen considerable increases in real estate prices partly due to foreign capital inflows. needless to say, if there were a substantial decline in real estate markets, nonperforming assets could pile up in the financial sector. such a scenario could hamper growth substantially and for a prolonged period, depending on the magnitude of the problem. to prevent such distortions and risks from building up, commercial banks and financial supervisory authorities need to enhance their credit risk management capacity. they need to instill a credit culture in which credit is proactively managed in response to changes in the environment. these actions could be effective throughout asian economies. another possible course is to use macroprudential policy. while discussions on macroprudential policy continue, particularly in the united states and europe, some asian economies have already gone ahead and introduced them. for instance, the bank of thailand has implemented policy measures such as ltv limits