Japan’s economy returns to peak performance, raising potential for increase in interest rates – Firstpost

Japan’s Economy on the Rebound: Could Rising Interest Rates be Next?

Japan’s economy has shown strong signs of recovery, with its economic output reaching full capacity for the first time in four years during the October-December quarter. This positive development has sparked speculation that the Bank of Japan (BOJ) may consider raising interest rates once again. The BOJ estimated that the country’s output gap, which measures the difference between actual and potential output, was +0.02 per cent in the final quarter of last year. This marked a significant improvement from the -0.37 per cent recorded in the previous quarter, marking the first positive reading in 15 quarters.

The output gap is a crucial indicator for the BOJ, as it helps determine if the economy is experiencing strong expansion that could lead to increased demand-driven inflation. A positive output gap occurs when actual output exceeds the economy’s full capacity, signaling strong demand. This is considered essential for driving up wages and sustaining inflation around the BOJ’s 2 per cent target.

After eight years of negative interest rates, the BOJ recently shifted its focus away from combatting deflation and towards promoting economic growth. This historic change in policy has led to speculation about when the central bank might raise interest rates again. The yen’s value has fallen to near 152 to the dollar, raising concerns about potential intervention by Japanese authorities to stabilize the currency.

In conclusion, Japan’s economic recovery has been impressive, with its economic output reaching full capacity for the first time in four years during the October-December quarter. The positive development has sparked speculation that the Bank of Japan (BOJ) may consider raising interest rates once again. While this shift in policy marks a significant departure from past practices, it remains uncertain when interest rates will be raised again as Japanese authorities continue to monitor currency fluctuations closely.

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