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Masaaki, Governor of the Bank of Japan, at the London School of Economics

BY Boon Koh
Published 13 January 2012

While The London Insider is normally focused on the more social aspects of London, sometimes it’s worth highlighting some of the more serious events that happen here. A talk earlier this week by the Governor of the Bank of Japan, Masaaki Shirakawa, at the London School of Economics was very relevant to one of the most important issues affecting the UK right now – the credit crunch.

The talk by Masaaki Shirakawa was titled Deleveraging and Growth: is the developed world following Japan’s long and winding road?. Shirakawa is no stranger to credit crunches or recessions – his country, Japan, has seen what most people call the “two lost decades”, which started after the economic bubble burst in Japan during the early 1990’s. However, Shirakawa pains to explain that actually, those two lost decades were very different. The second, from the early 21st century after millennium, was driven by a declining and aging population. While the first decade is in many ways very similar to what the Western world has been experiencing since the credit crunch in 2007.


Many of the audience were there to find out insight about why Japan was unable to revive itself during that lost first decade. Even Mervyn King, the current Governor of the Bank of England, was in attendance. Masaaki Shirakawa is probably only one of the most knowledgeable people in the world on that subject, but in my opinion, even he failed to come up with a pinpoint diagnosis that could be used to solve our current ailment.

Shirakawa drew many parallels with what happened in Japan with what is currently happening in the UK, US, and more worryingly, in the European Union. Such is the short term memory of the media that it is often portrayed that Quantitative Easing is a magical new phenomenon dreamed up by Western central bankers after the credit crunch, when in fact the Japanese tried it all – and more – in the early nineties and didn’t manage to get it to work.

A diagnosis alluded to within his speech about Japan’s inability to turn it around was the concept of too little, too late. Japan’s central bank was not very quick to pull all the tricks out of its bag, and the Japanese culture of corporate family meant that many companies held on to workers long after they should have been let go – hence Japan’s surprisingly low unemployment rate throughout the nineties. Both were tackled headlong by Western central bankers when our time came, with huge aggressive interest rate cuts, monetary easing, and companies retrenching staff at an alarming rate. But none of this has helped the Western economies get back on their feet again and start growing at a healthy rate again. Instead the Western world has suffered socially – with higher unemployment and reduced social spending.

So are there lessons that can still be applied from Japan to the current situation? So far none of the lessons learnt have really worked. But one consolation is that even if the UK follows Japan route and goes through two “lost” decades, is it all that bad? Japan is still a fully functional, innovative, modern society, and its people are doing alright. The moral of the story is that maybe we should stop and be happy with what we have so far and stop worrying about getting more economically – after all, life here is still better than in many other parts of the world.

If you want to experience Shirakawa’s Deleveraging and Growth: is the developed world following Japan’s long and winding road? talk, the LSE has the transcript and a video/podcast recording on its website.