The Bank of Japan has a positive general outlook for Asian economies but warns that some countries in the region face medium-to-long-term challenges that need to be addressed to ensure a smooth transition to well-balanced economic growth.
Those risks include demographic challenges, excessive credit expansion, and the destabilisation of the financial system.
Speaking at the fourth Bank of Thailand Policy Forum, Haruhiko Kuroda, governor of Japan’s central bank and the former president of the Asian Development Bank, said his country was in the midst of dealing with significant demographic challenges – with an ageing population a large part of the problem.
“In Asia, China and [South] Korea are next in line to face demographic challenges that Japan is currently experiencing, and Thailand is not far behind,” he said.
He said these challenges resulted in a series of problems, and the most pressing of them were a decline in economic growth and a deterioration in fiscal balance.
He said the problems could also add pressure to domestic-demand growth and contributed to sluggish growth in the capacity to provide goods and services.
There could also be worsened fiscal deficits from rising expenses for pensions and healthcare, which would put more pressure on future generations and raise the issue of intergenerational income mobility.
“While demographic changes can be predicted quite apparently, reversing them is extremely difficult,” Kuroda said. “However, similar to other problems that are too serious or difficult, initiatives to address those problems tend to be put off.”
He warned that increasing middle-class populations in Asia could fuel excessive growth of credit and domestic demand, leading to crises such as a housing bubble.
“History tells us that bubbles often arise when people’s expectations become bullish due to the experience of continuous high growth and domestic-demand expansion,” he said.
“The symptoms that were common in each [bubble] crisis are a rapid increase in credit and the increase of euphoria based on the belief that the country has entered a new phase.”
To prevent a dangerous increase in domestic credit and the growing risks of non-performing loans, commercial banks in Asia need to enhance their risk-management capacity, he said. This would create a culture of lending that was proactively managed to respond to changes in the economic environment, while countries should practise policies that enhance the robustness of their financial systems.
Kuroda also stressed the growing importance of financial cooperation in the region, such as the Chiang Mai Initiative Multilateralisation, that aimed to prevent future financial crises.
“Information of microeconomic policies and challenges that each country faces should be exchanged on a regular basis, and at the same time it is essential to create a network to share information swiftly and rapidly in response to sudden changes in international financial markets,” he said.
Kuroda said international risks on Asia’s real economies and financial markets were minimal – “so far so good” – while the political situation in Thailand was a matter of interest for Japanese investors, firms, and politicians because of the extensive investment and trade ties between the two countries.