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Japan’s economic output returned to full capacity for the first time in about four years in the October-December quarter, signaling a positive outlook that could lead to an increase in interest rates by the central bank. The Bank of Japan’s estimate showed that the country’s output gap, which measures the difference between actual and potential output, was at +0.02% in the final quarter of last year. This marked a significant improvement from the -0.37% reading in the previous quarter and was the first positive reading in 15 quarters.

The output gap is a key indicator that the BOJ uses to assess the strength of the economy and its ability to drive inflation. A positive output gap indicates that the economy is operating above its full capacity, reflecting strong demand. This is considered essential for wage growth and sustained inflation around the BOJ’s 2% target.

The BOJ recently ended eight years of negative interest rates and other unconventional policies, shifting its focus towards promoting growth and inflation. Market watchers are now awaiting signals on when the central bank might decide to raise interest rates again. Speculation that the BOJ may proceed cautiously with further rate hikes has contributed to a weaker yen, with the currency nearing 152 to

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