Dovish BOJ policymaker calls for new strategy to beat price stagnation

By Leika Kihara

TOKYO (Reuters) - The Bank of Japan must lay out a new strategy for hitting its elusive 2% inflation target at this month's policy review, board member Goushi Kataoka said, warning the drag to growth from the COVID-19 pandemic could prolong price stagnation.

Kataoka said the pandemic's hit to demand will likely delay Japan's economic recovery and weigh on inflation expectations, which have been falling since the end of 2019.

"If we see a repeated rise in infections, that would negatively affect both the output gap and inflation expectations. This, in turn, will prolong price stagnation," Kataoka said in a speech to an online meeting with business leaders on Wednesday.

The BOJ plans to conduct a review of its policy tools in March to make them more sustainable and flexible to weather what had become a prolonged battle to reflate growth and achieve its price goal. Governor Haruhiko Kuroda has stressed the review will not lead to an overhaul of its stimulus programme.

"The BOJ must examine and explain its policy strategy going forward, taking into account how the path toward achieving its price target has become unclear," Kataoka said of the policy tools review.

Kataoka, seen as the most dovish policymaker in the BOJ's nine-member board, has lobbied unsuccessfully for cutting interest rates and strengthening the BOJ's commitment to take stronger steps to fire up inflation.

He repeated his calls for the BOJ to more strongly commit to keeping rates low for a prolonged period.

"It's hard now to foresee inflation powerfully heading towards our 2% target," Kataoka said.

(Reporting by Leika Kihara; Editing by Chang-Ran Kim and Lincoln Feast.)