The U.S. economy needs painful measures to get out of the recession, Bank of Japan Governor Masaaki Shirakawa said Thursday.
Addressing the Japan Society in New York, Shirakawa said, I think the U.S. economy needs to work out excesses, which include unsustainable financial leverage, household over-indebtedness, and perhaps the over-extension of the financial industry. This will be painful but inescapable.
He said there are amazing similarities between Japan's experience in the 1990s and what the U.S. has been through since the summer of 2007. Throughout the 1990s, Japan's economy was caught in a prolonged stagnation. The economy, which is the world's second largest, also experienced a systemic financial crisis. Because of these, Japan's 1990s is often referred to as the lost decade.
The BoJ chief stressed the need to resist a descent into protectionism by any means, while having the pain associated with the unwinding of excesses. Shirakawa asserted that similar to protectionism, regulatory overreaction will also undermine the economic efficiency, thereby putting downward pressure on productivity growth.
Noting the remarkable similarities between Japan and the U.S., Shirakawa said both countries enjoyed high economic growth and low inflation for an extended period of time before the latest financial crisis.
Further, he said it took quite a while to understand how serious the negative impact of the bubble bursting was, on the economy in the early stage. The U.S. is no exception in this regard, he said.
We optimistically thought Japan's economy would pick up once cyclical corrections in business investment had run their course. This initial optimism was proved wrong by the subsequent deterioration in the downward spiral between the financial system and the real economy.
Shirakawa said central banks should not be hesitant in pursuing aggressive monetary easing when economic conditions warrant. In a severe economic crisis, policymakers have to be careful not to mistake a temporary rebound in the economy, or a false dawn I would say, for a genuine recovery. He added that central banks should also be mindful of a timely exit from those aggressive easing measures. A late exit can be an entry into something worse.
For comments and feedback: contact firstname.lastname@example.org