Japan’s economy has shown signs of recovery as its economic output reached full capacity for the first time in four years during the October-December quarter, according to a report from the Bank of Japan. This positive development may pave the way for the central bank to raise interest rates once again. 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 marked a significant improvement from the negative reading of -0.37% in the third quarter and was the first positive reading in 15 quarters.
The output gap is closely monitored by the BOJ to gauge whether the economy is expanding strongly enough to generate a demand-driven increase in inflation. A positive output gap occurs when actual output exceeds the economy’s full capacity, signaling strong demand. Analysts view this as a critical factor for potential wage increases and sustained inflation around the BOJ’s target of 2%.
Recent policy changes by the BOJ, including ending eight years of negative interest rates and unconventional monetary stimulus, indicate a new focus on promoting inflation and growth. As markets anticipate possible future rate hikes, the yen has weakened against the dollar, reaching near 152. This level heightens the possibility of intervention by Japanese authorities to stabilize the currency.
Overall, Japan’s economic recovery signals a potential shift towards higher interest rates and increased inflation, marking a new phase in its monetary policy.
