UPDATE 1-BOJ has room for policy review, must stick to price goal, says deputy gov

* BOJ must be vigilant to risk of soft inflation – Wakatabe

* Adds temporary shocks may lead to persistent stagnation

* Calls for ‘deep’ debate on improving monetary policy – Wakatabe (Recasts with quotes, context on central bank policy reviews)

By Leika Kihara

TOKYO, Sept 2 (Reuters) – The Bank of Japan (BOJ) must maintain its strong commitment to achieve its 2% inflation target and consider ways to improve its monetary policy, deputy governor Masazumi Wakatabe said, as the coronavirus pandemic stokes fears of deflation.

While Japan’s coronavirus-hit economy is showing some signs of recovery, sluggish demand could persist as uncertainties on when the health crisis will be contained may discourage companies and households from spending, he said.

“For the time being, it’s necessary to be vigilant against the risk of a decline in the inflation rate,” Wakatabe said in a speech in Saga, southern Japan, on Wednesday.

He also warned that temporary external shocks, such as the current pandemic, could lead to persistent stagnation.

“In order to address both upside and downside risks to prices, the BOJ must continue to strongly commit itself to achieving its price target,” he said.

Japan is facing a leadership race later this month after Prime Minister Shinzo Abe’s decision to step down due to health reasons. Yoshihide Suga, the government’s top spokesman, is emerging as the front-runner to succeed Abe, heightening expectations that many of the premier’s stimulus policies will be maintained.

As the pandemic chokes economic activity, some central banks have reviewed their policy frameworks in search of better ways to address prolonged periods of weak growth and persistently low inflation – a scenario economists have dubbed “Japanification.”

Wakatabe said the BOJ, too, must “constantly have deep discussions” on how to improve its policy, but he did not elaborate.

“It’s necessary to give further consideration to what kind of monetary policy should be taken in the COVID-19 era, while referring to discussions being held at other central banks.”

Analysts expect Japan’s core consumer prices, which were flat in July from a year earlier, to slide in coming months due to soft demand, reviving fears of a return to deflation. (Editing by Chris Gallagher and Jacqueline Wong)

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