Japan’s economy fully recovers, maintaining prospects for BOJ rate hike

Japan’s Economic Recovery: Full Capacity Output and Positive Output Gap Signaling Growth and Inflation

Japan’s economy has shown signs of recovery in the October-December quarter, with full capacity output for the first time in four years, 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 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.

A positive output gap occurs when actual output exceeds an 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 shift towards higher interest rates and increased inflation marks a new phase in Japan’s monetary policy.

Overall, Japan’s economic output has shown signs of recovery after four years of stagnation, with full capacity output recorded for Q4 2020 thanks to Bank of Japan’s report that closely monitors this indicator to gauge whether an economy is expanding strongly enough to generate demand-driven inflation. A positive output gap signals that actual output exceeded an economy’s full capacity, indicating strong demand which could potentially lead to sustained inflation around BoJ’s target of 2%. The recent shift in policy by BoJ ending eight years of negative interest rates and unconventional monetary stimulus indicates a new focus on promoting inflation and growth while weakened yen against dollar reaches near 152 level heightens possibility intervention by Japanese authorities to stabilize currency marking new phase in country’s monetary policy

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