BOJ policymaker warns of risks to Japan’s recovery from Ukraine crisis

A man wearing a protective mask walks past the Bank of Japan headquarters amid the coronavirus disease (COVID-19) outbreak in Tokyo, Japan, May 22, 2020.REUTERS/Kim Kyung-Hoon

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  • BOJ needs to focus on downside risks to economy – Kataoka
  • Jan BOJ minutes show growing focus on inflationary pressure
  • Wage growth is key to a sustained rise in inflation – minutes
  • March plant activity accelerated in March – survey

TOKYO, March 24 (Reuters) – Russia’s invasion of Ukraine will weigh on global growth and increase risks to Japan’s economic recovery, a central bank official said on Thursday, stressing the need to maintain a extremely flexible monetary policy even if inflation increases.

Although consumer inflation may briefly top 1.5%, it is unlikely to gain momentum to sustainably head towards the Bank of Japan’s 2% target, said Goushi Kataoka, who served as the sole proponent of increased monetary stimulus.

“Disruptions to Russia-related trade will not only weigh on the Russian economy but also on global growth by prolonging global supply constraints,” Kataoka told business leaders in a speech.

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“For now, we need to pay attention to downside risks to the Japanese economy…as well as upside price risks.”

While supporting the economy remains a priority over fighting inflation, BOJ policymakers were paying more attention to rising inflationary pressures even before Russia’s invasion of Ukraine on February 24.

At their January meeting, bank board members agreed that consumer inflation could beat their expectations if companies pass on higher costs faster than expected, minutes of the meeting showed on Thursday. the meeting.

“Many companies feel the limit of sticking to a business model that has been successful during deflation. As they change their pricing behavior, inflationary pressure may intensify,” he said. a quoted member.

“We see stock prices go up for companies that raise prices,” another member said. “Price rises can widen and raise inflation expectations over the medium to longer term.”

Many members said they were keeping a close eye on wages, which make up a significant portion of service costs and determine how well households can absorb price increases, according to the minutes.

Japan has lagged other advanced economies in recovering from the pandemic crisis as economic growth stagnated in the current quarter due to weak consumption.

In a glimmer of hope, a survey released Thursday showed Japanese manufacturing activity accelerated in March as falling COVID-19 cases helped push up orders. Read more

But soaring fuel and grain prices are adding pain to resource-poor Japan by driving up import costs, casting doubt on the BOJ’s view that the world’s third-largest economy is heading for a moderate recovery. .

At last week’s meeting, the BOJ downgraded its economic assessment and warned of heightened risks from the Ukraine crisis, a sign that it was in no rush to recall stimulus measures. relaunch. Read more

Japan’s core consumer prices rose 0.6% in February from a year earlier, marking the fastest pace in two years, but still well below the 2% target of the BOJ as weak household spending discouraged companies from passing on soaring commodity costs.

While many analysts expect rising fuel costs to drive core inflation close to 2% in the coming months, there is uncertainty as to whether the increase will continue, as slow wage growth weighs on consumption.

The BOJ has repeatedly stressed its determination to maintain its massive stimulus package for now, even as other major central banks consider exiting crisis-mode policies.

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Reporting by Leika Kihara; Editing by Jane Wardell and Sam Holmes

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