Japan’s Economy Bounces Back to Full Strength, Maintains Possibility of BOJ Rate Increase

Japan’s economy has shown a significant improvement in its output gap, indicating that the Bank of Japan (BOJ) may consider raising interest rates again. The BOJ’s estimate showed that the output gap was at +0.02% in the final quarter of last year, marking a substantial improvement from the -0.37% reading in the previous quarter and the first positive reading in 15 quarters.

The output gap is an essential factor that the BOJ closely monitors to determine if the economy is expanding robustly enough to drive demand and inflation. A positive output gap occurs when actual output exceeds an economy’s full capacity, indicating strong demand. Analysts view this as a prerequisite for wage increases and sustainable inflation around the BOJ’s 2% target. Following the BOJ’s decision to end negative interest rates and shift away from its focus on deflation towards economic growth, markets are closely watching for any hints of when the central bank might raise interest rates again.

However, there are concerns about a cautious approach to further rate hikes, which has caused the yen to weaken to around 152 against the dollar. This level is seen as increasing the likelihood of yen-buying intervention by Japanese authorities, which could result in more capital inflows into countries like Malaysia according to experts. Overall, investors and analysts closely watch Japan’s economic output and policy decisions for their potential impact on global markets.

In summary, Japan’s return to full economic capacity during Q4 marks a significant step forward for its economy and could pave the way for a rise in interest rates from its central bank. However, concerns about yen-buying intervention by Japanese authorities remain as they monitor any potential impact on global markets.

By Sophia Gonzalez

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