April 20, 2024 4:35 am
Japan’s economy fully recovers, increasing likelihood of interest rate hike – Firstpost

Japan’s economy showed a significant improvement in the October-December quarter, with its economic output reaching full capacity for the first time in four years. This promising development could lead to the central bank considering raising interest rates. The Bank of Japan (BOJ) released an estimate on Wednesday that showed Japan’s output gap, which measures the difference between actual and potential output, reached +0.02 percent in the final quarter of last year. This was a significant improvement from the -0.37 percent recorded in the previous quarter, marking the first positive reading in 15 quarters.

The output gap is 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.

In recent years, the BOJ has been focused on tackling deflation and stimulating growth with extensive monetary stimulus through negative interest rates. However, this strategy has come to an end as markets closely watch 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 a weakening yen, approaching 152 to the dollar. This level is seen as increasing the likelihood of Japanese authorities intervening by buying yen to stabilize the currency.

Overall, Japan’s economic output reaching full capacity is a promising development that could lead to more significant changes in monetary policy by the BOJ. While it remains uncertain how quickly or aggressively interest rates will be raised, this shift marks an important turning point for Japan’s economy and its ability to sustain growth over time.

In conclusion, Japan’s economic output reached full capacity during Q4 of 2020 after four years of being below capacity levels, marking a significant improvement from -0.37% recorded in Q3 2020. The Bank of Japan estimates show that this was due to strong demand leading to an increase in actual output exceeding full capacity levels (output gap). The positive reading marks a shift away from negative readings for 15 quarters and indicates that there might be more changes coming regarding monetary policy by BoJ soon.

However, expectations that BoJ will proceed cautiously with further rate hikes have resulted in a weakening Yen approaching 152/USD levels. This level increases Japanese authorities’ likelihood of intervening by buying Yen to stabilize currency levels.

This shift marks an important turning point for Japan’s economy and its ability to sustain growth over time while also paving way for more significant changes in monetary policy by BoJ in future quarters or years ahead.

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