In the October-December quarter, Japan’s economic output has recovered to full capacity for the first time in about four years, according to a report from the Bank of Japan (BOJ). 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 BOJ closely monitors the output gap 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%.
The recent shift in policy by the BOJ, ending eight years of negative interest rates and unconventional monetary stimulus, indicates 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, these positive developments in Japan’s economic output signal a potential shift towards higher interest rates and increased inflation, marking a new phase in
