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Japan’s economy is back at full capacity, sparking speculation of a rate hike by the BOJ

Byeditor

Apr 3, 2024

Japan’s economic output has recovered to full capacity for the first time in about four years in the October-December quarter, which is seen as a positive sign that may allow the central bank to raise interest rates again. According to an estimate by the Bank of Japan (BOJ), Japan’s output gap, which measures the difference between an economy’s actual and potential output, stood at +0.02% in the final quarter of last year. This was a significant improvement from the -0.37% reading in the third quarter and marked the first positive reading in 15 quarters.

The output gap is closely monitored by the BOJ as it helps to determine whether the economy is growing strongly enough to trigger a demand-driven rise in inflation. A positive output gap occurs when actual output exceeds the economy’s full capacity, indicating strong demand. Analysts view this as a key factor in driving wage increases and pushing inflation towards the BOJ’s 2% target.

Last month, the BOJ ended eight years of negative interest rates and other unconventional policies, marking a shift away from focusing on defeating deflation to promoting growth through massive monetary stimulus. The financial markets are closely watching for any indications of when the central bank may consider raising interest rates again. The expectation of a more cautious approach to rate hikes has led to a weaker yen, approaching 152 to the dollar, raising concerns about potential intervention by Japanese authorities.

The stronger yen has resulted in more capital inflows into Malaysia, according to experts. This trend highlights the interconnectedness of global economies and the impact that monetary policies in one country can have on others. The positive economic outlook in Japan, coupled with the potential for interest rate hikes, is likely to have far-reaching implications for the region and beyond.

By editor

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