On May 18th, the "2026 Tsinghua PBCSF Global Finance Forum," hosted by Tsinghua University and organized by the PBC School of Finance at Tsinghua University, officially opened in Chengdu, Sichuan. The forum's core theme was "Global Financial Governance in a Changing World: New Challenges, Opportunities, and Developments." During the opening "High-Level Dialogue" session that morning, several economic policymakers and scholars, including 2001 Nobel laureate in economics Michael Spence and former Governor of the Bank of Japan Masaaki Shirakawa, engaged in a profound discussion analyzing macroeconomic trends and the future evolution of the global financial governance system.
As a key decision-maker who personally navigated the 2008 global financial crisis and Japan's balance sheet recession, Shirakawa's remarks resonated strongly. He served as Governor of the Bank of Japan from April 2008 to March 2013, a tenure that included the subprime mortgage crisis and Japan's "3/11" earthquake. During this period, he spearheaded the implementation of unconventional monetary policies, giving him deep insight into the pros and cons of extreme liquidity provision.
In the dialogue, Shirakawa directly addressed the current global dilemma of balancing inflation and growth. He offered a deep reflection on how prolonged, extremely accommodative policies have created an "endogenous" backlash against central bank independence and exchange rates. He explicitly stated that central banks are not "magical institutions" and called for society to clarify the boundaries of monetary policy and face the necessary pain of structural reforms.
**Prolonged Easing Breeds "Endogenous" Policy Dilemmas**
Discussing the current global macroeconomic environment, Shirakawa pointed out that intensifying geopolitical risks, intertwined with upward inflationary pressures and downward economic pressures, have become severe challenges faced by countries worldwide. He emphasized that the supply-side shocks currently impacting the global economy are largely man-made, and relying on economic forecasting models to predict the ultimate trajectory of various conflicts is often ineffective.
Faced with this complex predicament, traditional central bank theory suggests a response: if a supply-side inflationary shock is temporary, a central bank can choose to ignore short-term fluctuations and maintain monetary policy discipline. However, Shirakawa expressed deep skepticism about the applicability of this traditional logic in the current environment. He believes that global supply chain disruptions and persistent shocks caused by geopolitical conflicts will not dissipate quickly. The global economy needs to adapt to a new normal of frequent supply-side shocks. If central banks cling to the assumption that shocks are short-lived and delay policy adjustments, they will eventually become reactive and passive in their policymaking.
Furthermore, Shirakawa analyzed the widespread challenge of weakened central bank independence from an institutional perspective, offering a new judgment: the risk of fiscal dominance, which financial markets widely fear, does not entirely stem from external political pressure. To a large extent, it originates from within the central banking system itself.
"The root cause lies in the central banks' own policy apprehensions, their fear that adjusting long-standing accommodative policies will trigger unpredictable market risks," Shirakawa stated. The long-term implementation of ultra-accommodative monetary policies has created a strong path dependency on low-cost funding in the markets. When inflation forces a return to policy normalization and the initiation of a rate-hiking cycle, central bank policymakers universally worry about sharp asset price fluctuations and rising government debt financing costs, leading to decision-making hesitation and self-imposed constraints. In his view, this internal policy apprehension has substantially weakened central bank independence, ultimately causing monetary policy to deviate from its intended course.
Shirakawa stated plainly that, based on macroeconomic data and trend forecasts, the Bank of Japan has a clear logical case for raising interest rates and should steadily proceed with hikes once economic indicators are met. However, in reality, the Bank of Japan has consistently been cautious and slow in its approach to policy normalization and the pace of rate increases. The stagnation in the rate hike process has already generated numerous negative effects in the short term, with the sharp depreciation of the yen being a typical example. He believes that the Bank of Japan's hesitation on raising rates is essentially a fear that policy adjustments will trigger chain reactions of risk—a negative side effect that has been accumulating and lying dormant as a result of prolonged, extremely accommodative monetary policy.
**Clarifying the Objective Limits of Monetary Policy, Debunking the "Central Bank Omnipotence" Theory in the Context of Aging Restructuring**
If monetary policy is not a panacea, where does the real driving force for sustainable global economic growth lie? Shirakawa turned his focus to a structural constraint: dramatic demographic shifts.
Shirakawa pointed out that a common misconception exists in macroeconomic discussions about population aging and declining birth rates: people tend to view the decrease in total population and the increase in labor productivity as separate issues. Many optimistic views hold that as long as technological progress can maintain per capita productivity growth, society need not overly worry about the continued shrinking of the population size. However, drawing on Japan's experience combating deflation and its demographic crisis, Shirakawa issued a warning: these two factors are deeply intertwined and mutually causal. Observations from Japan's experience show that a sustained negative decline in total population directly and significantly drags down labor productivity growth through various hidden channels. Therefore, both policymakers and society as a whole must completely abandon wishful thinking and establish comprehensive institutional safeguards against this long-term demographic structural crisis.
Building on this, Shirakawa further critiqued and corrected the prevalent market notion of "central bank omnipotence," citing former Federal Reserve Chairman Paul Volcker's view: society should not expect central banks to achieve developmental goals that lie outside their functional scope and are beyond their capacity.
"Central banks play a pivotal role, but they are by no means institutions capable of performing magic," Shirakawa emphasized, invoking "Tinbergen's rule," which states that the number of policy objectives must strictly match the number of policy instruments. According to this principle, monetary policy should focus on the core area where it is most effective: maintaining long-term price stability.
However, in real-world economic governance, policy boundaries often become severely distorted. Whenever the macroeconomy faces growth stagnation, various parties often expect central banks to implement extreme easing "without cost" to fix all economic objectives. Shirakawa offered a stern rebuttal to this. He emphasized that in economic logic, the long-term benefits and secondary costs of a policy are inevitably two sides of the same coin. If a central bank focuses only on the short-term stimulus benefits while ignoring or downplaying the deep-seated side effects that prolonged, extreme easing inflicts on the financial system, the ultimate social cost borne by the real economy will be immeasurably large. Therefore, central banks must strictly adhere to the "principle of proportionality," and society must rationally recognize the objective limitations of monetary policy.
The only viable path to fundamentally address the dilemma of persistently declining potential growth rates is to advance structural and institutional reforms. Concluding his remarks, Shirakawa shared a thought-provoking anecdote from his past: when he served as Governor of the Bank of Japan and frequently emphasized the importance of structural reform in public, he did not gain policy cooperation. Instead, he faced harsh criticism from political circles. Critics accused him of shirking responsibility, trying to deflect public questioning about "the central bank's failure to implement more aggressive monetary easing" by emphasizing structural reform. This significant distortion of the central bank's role by political and public opinion often causes economies to miss the real window for healing, a lesson that offers profound insights for current global financial governance.
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