Japan’s economy recovers to full capacity, keeps alive BOJ rate hike prospects

Japan’s economy recovers to full capacity, keeps alive BOJ rate hike prospects

Subject: Economy

Section: External Sector

Japan’s economic output recovered to full capacity for the first time in about four years in the October-December quarter, a positive sign that may allow the central bank to raise interest rates again.

What is output gap?

• It measures the difference between an economy’s actual and potential output.
• It stood at +0.02% in the final quarter of last year(Bank of Japan (BOJ) ).
• The output gap is among data the BOJ watches closely in determining whether the economy is expanding strongly enough to propel a demand-driven rise in inflation.
• A positive output gap occurs when actual output exceeds the economy’s full capacity, and is considered a sign of strong demand. It is seen by analysts as one of a handful of prerequisites for wages to rise more, and push inflation sustainably around the BOJ’s 2% target.
• The BOJ ended eight years of negative interest rates and other remnants of its unorthodox policy last month, making a historic shift away from its focus on quashing deflation and reflating growth with decades of massive monetary stimulus.
• Markets are on the look-out for any clues on how soon the central bank could raise interest rates again.
• Expectations that the BOJ will go slow in any further rate hikes have pushed the yen down to near 152 to the dollar, a level seen by markets as heightening the chance of yen-buying intervention by Japanese authorities.