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

Japan’s economy has shown signs of a strong recovery in the October-December quarter as its economic output returned to full capacity for the first time in four years. This positive development may indicate that the central bank, Bank of Japan (BOJ), is considering raising interest rates again. The BOJ’s estimate showed that 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 is a significant improvement from the -0.37% reading in the previous quarter and marks 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 the 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 that Japan may take a cautious approach to further rate hikes, which has caused the yen to weaken to around 152 against

By Samantha Johnson

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