TOKYO -- Japan faces unforeseen risks in guiding economic policy as its population of about 126 million ages and declines, the governor of its central bank said Thursday.
Bank of Japan Gov. Haruhiko Kuroda told fellow financial leaders Thursday that policies must be devised to prevent the shrinking population from hindering economic growth.
Since taking his post in April 2013, Kuroda has flooded Japan's economy with cash through central bank asset purchases to help fight deflation and keep the economy growing. The BOJ also imposed a negative interest rate policy to keep lending costs ultralow in the longer term.
The conventional strategy of controlling short-term interest rates to keep inflation in check while stimulating business activity is well understood, Kuroda said. But he warned that the unconventional methods the Bank of Japan has adopted can have unexpected consequences.
Kuroda has repeatedly emphasized the limits to what the central bank can do to promote sustained growth in an age of rising national debt and feeble consumer demand. He has urged the government to push ahead with labor and other reforms to help achieve faster growth and attain the government's inflation target of about 2 percent.
Kuroda said one of the potential pitfalls of the current policies could be if banks use cheap credit to seek higher yielding, high-risk investments harmful to financial stability.
"Policymakers need to manage prudential policy appropriately, taking into account the fact that the risk profiles of financial institutions could be dramatically transformed during times of demographic change," he said.
Japan's population began shrinking several years ago and is rapidly aging. That has discouraged companies from investing and hiring within Japan, while they direct their efforts toward faster growing overseen markets.
On the other hand, aging populations create new markets for many products and services, so there are positives along with the challenges, he added.
Kuroda and other senior financial officials were speaking at a seminar linked to Japan's hosting of the Group of 20 major economies in 2019. The G-20 summit is due to be held in Osaka later this year.
Taro Aso, Japan's 78-year-old finance minister, told the gathering that as one of the eldest holding that post, "to give you an illustrative example ... many elderly in Japan are healthy and in good condition and remain very active like myself — and that implies the emergence of new opportunities."
One of the biggest challenges is providing support and care for the elderly when the working population becomes much smaller than in the past, Kuroda noted.
That is raising the levels of public debt as costs for medical care and pensions rise, and that causes people to save more money to prepare for such burdens, which in turn hurts growth, he noted.
The key is to devise better ways to manage social safety nets, manage the financial system and promote innovation and greater productivity, Kuroda said, adding that "If pessimism about future economic growth prevails not only future but also present demand could be stifled as people are discouraged from current investment and consumption."
Business Writer Elaine Kurtenbach in Bangkok contributed to this report.