Japan’s Economic Output Reaches Full Capacity for First Time in Four Years: Will Bank of Japan Raise Interest Rates Again?

Japan’s economic output has returned to full capacity for the first time in approximately four years during the October-December quarter. This positive development may signal that the central bank, the Bank of Japan (BOJ), will consider raising interest rates again. The BOJ’s estimate showed that the output gap, which measures the difference between an economy’s actual and potential output, was at +0.02% in the final quarter of last year. This marks a significant improvement from the -0.37% reading in the previous quarter and is the first positive reading in 15 quarters.

The output gap is a crucial factor that the BOJ monitors closely to determine if the economy is expanding robustly enough to drive demand and inflation. A positive output gap occurs when actual output exceeds the economy’s full capacity, indicating strong demand. Analysts view this as a prerequisite for wage increases and sustainable inflation around the BOJ’s 2% target. Following the BOJ’s decision to end negative interest rates and shift away from its focus on deflation towards economic growth, markets are watching for any hints of when the central bank might raise interest rates again.

However, there are concerns that the BOJ may take a cautious approach to further rate hikes, which has caused the yen to weaken to around 152 against the dollar. This level is seen as increasing