Japan’s economy fully rebounds, maintaining potential for BOJ interest rate hike

In the October-December quarter, Japan’s economic output returned to full capacity for the first time in about four years, signaling a positive outlook that could lead to an increase in interest rates by the central bank. This marked a significant improvement from the -0.37% reading in the previous quarter and was the first positive reading in 15 quarters.

The Bank of Japan (BOJ) uses a key indicator called the output gap 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.

Recently, the BOJ 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 the dollar. This has raised concerns about potential yen-buying intervention by Japanese authorities to stabilize the exchange rate.

In summary, Japan’s economic output returning to full capacity is a positive sign for its economy and could lead to an increase in interest rates by its central bank. The output gap is a key indicator used by the BOJ to assess

By Sophia Gonzalez

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