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TOKYO (Reuters) – The Bank of Japan must set a new strategy to meet its elusive 2% inflation target during this month’s policy review, board member Goushi Kataoka said, warning that the drag on the growth of the COVID-19 pandemic could prolong price stagnation.
Kataoka said the impact of the pandemic on demand would likely delay Japan’s economic recovery and weigh on inflation expectations, which have been declining since the end of 2019.
“If we see a repeated increase in infections, it would negatively affect both the output gap and inflation expectations. This, in turn, will prolong price stagnation, ”Kataoka said in a speech Wednesday at an online meeting with business leaders.
The BOJ plans to conduct a review of its policy tools in March to make them more durable and flexible to withstand what had become a protracted battle to revive growth and meet its price target. Governor Haruhiko Kuroda stressed that the review would not lead to an overhaul of his stimulus program.
“The BOJ needs to review and explain its policy strategy going forward, taking into account that the path to achieving its price target has become blurred,” Kataoka said of the review of policy tools.
Kataoka, considered the most accommodating policy maker of the nine BOJ board members, lobbied unsuccessfully to cut interest rates and strengthen the BOJ’s commitment to take stronger action to accelerate inflation.
He reiterated his calls for the BOJ to make a firmer commitment to keeping rates low for an extended period.
“It is now difficult to forecast inflation heading sharply towards our 2% target,” Kataoka said.
Reporting by Leika Kihara; Edited by Chang-Ran Kim and Lincoln Feast.
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