BOJ warns Japan faces new risks as population shrinks

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.

Kuroda told a seminar that while the conventional strategy of controlling short-term interest rates is well understood, the unconventional methods the Bank of Japan has adopted can have unexpected consequences.

Kuroda said one of the potential pitfalls could be if banks use cheap credit to seek higher yielding, high-risk investments harmful to financial stability.

"Policy makers 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.

On the other hand, aging populations create new markets for many products and services, so there are positives along with the challenges, he added.

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.