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

TOKYO, March 24 (Reuters) - Russia's invasion of Ukraine will weigh on global growth and heighten risks to Japan's economic recovery, a central bank policymaker said on Thursday, highlighting the need to keep monetary policy ultra-loose even as inflation perks up.

While consumer inflation may briefly exceed 1.5%, it likely won't gain momentum to sustainably head toward the Bank of Japan's 2% target, said Goushi Kataoka, who has been a sole proponent to ramp up monetary stimulus.

"Disruptions in Russia-related trade will weigh not just on Russia's economy but global growth by prolonging worldwide supply constraints," Kataoka told business leaders in a speech.

"For the time being, we must pay attention to downside risks to Japan's economy...as well as upside risks to prices."

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

At their January gathering, bank board members agreed that consumer inflation may overshoot their expectations if companies pass on rising costs quicker than forecast, minutes of the meeting showed on Thursday.

"Many companies are feeling the limit of sticking to a business model that was effective during deflation. As they change their price-setting behaviour, inflationary pressure may heighten," one member was quoted as saying.

"We're seeing stock prices rise for companies that hike prices," another member said. "Price hikes may broaden, and heighten medium- to long-term inflation expectations."

Many members said they were closely watching wages, which make up a big component of service costs and determine the extent to which households can absorb price hikes, the minutes showed.

Japan has lagged other advanced nations in recovering from the pandemic slump, with economic growth seen stalling in the current quarter due to weak consumption.

In a glimmer of hope, a survey released on Thursday showed Japan's manufacturing activity sped up in March as falling COVID-19 cases helped lift orders. read more

But soaring fuel and grain costs are adding pains to resource-poor Japan by pushing up import costs, casting doubt on the BOJ's view the world's third-largest economy is headed for a moderate recovery.

At last week's meeting, the BOJ downgraded its economic assessment and warned of heightening risks from the Ukraine crisis in a sign it was in no rush to dial back stimulus. 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 BOJ's 2% target, as weak household spending discouraged firms from passing on soaring raw material costs.

While many analysts expect rising fuel costs to push up core consumer inflation near 2% in coming months, there is uncertainty on whether the increase will be sustained as slow wage growth weighs on consumption.

The BOJ has repeatedly stressed its resolve to maintain its massive stimulus for the time being, even as other major central banks eye exits from crisis-mode policies.

Our Standards: The Thomson Reuters Trust Principles.