Japan’s economic output reached full capacity for the first time in four years during the October-December quarter, marking a promising development that could lead to the central bank considering raising interest rates. The Bank of Japan’s estimate released on Wednesday showed that Japan’s output gap, which measures the difference between actual and potential output, reached +0.02 percent in the final quarter of last year. This was a significant improvement from the -0.37 percent recorded in the previous quarter, marking the first positive reading in 15 quarters.
The output gap is a crucial indicator for the Bank of Japan as it monitors various economic measures to determine if the economy is experiencing strong expansion, capable of driving demand-led inflation. A positive output gap occurs when actual output exceeds full capacity, signaling strong demand. This is considered a prerequisite for increasing wages and achieving sustainable inflation around the BOJ’s 2 percent target.
The Bank of Japan recently ended eight years of negative interest rates in a shift away from its focus on tackling deflation and stimulating growth with extensive monetary stimulus. Markets are keenly watching for clues on when the central bank may raise interest rates again. Expectations that the BOJ will proceed cautiously with further rate hikes have led to the yen weakening, approaching 152 to the dollar. This level is seen as increasing the likelihood of Japanese authorities intervening by buying yen to stabilize the currency.
In conclusion, Japan’s economic output reaching full capacity for the first time in four years during the October-December quarter is a positive development that could lead to
