Japan’s economy fully recovers, increasing likelihood of interest rate hike – Firstpost

Japan’s economic output has reached full capacity for the first time in four years during the October-December quarter, a promising development that could lead to the central bank raising interest rates. The Bank of Japan recently ended eight years of negative interest rates and is now focusing on other measures to stimulate growth. The output gap, which measures the difference between actual and potential output, was a crucial indicator for the BOJ as it monitors various economic measures to determine if the economy is experiencing strong expansion capable of driving demand-led inflation.

A positive output gap occurs when actual output exceeds full capacity, signaling strong demand. This is considered a prerequisite for increasing wages and achieving sustainable inflation around the BOJ’s 2 percent target. The BOJ’s estimate released on Wednesday showed that Japan’s output gap reached +0.02 percent in the final quarter of last year, marking a significant improvement from -0.37 percent recorded in the previous quarter and was the first positive reading in 15 quarters.

The yen has weakened as markets are keenly watching for clues on when the central bank may raise interest rates again. Expectations that the BOJ will proceed cautiously with further rate hikes have led to this level of weakness, approaching 152 to the dollar. This level is seen as increasing the likelihood of Japanese authorities intervening by buying yen to stabilize the currency.

In conclusion, Japan’s economic output reaching full capacity is a positive development that could pave the way for raising interest rates by central bank and also reducing negative impact on currency exchange rate which could lead to intervention by Japanese authorities to maintain stability in currency market.

By Sophia Gonzalez

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