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Japan’s economy returns to peak performance, raising potential for increase in interest rates – Firstpost


Apr 3, 2024

Japan’s economic output reached full capacity for the first time in approximately four years during the October-December quarter, prompting speculation that the central bank may consider raising interest rates once again. The Bank of Japan (BOJ) estimated that the country’s output gap, which measures the difference between actual and potential output, was +0.02 per cent in the final quarter of last year. This marked a significant improvement from the -0.37 per cent 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 helps determine if the economy is experiencing strong expansion that could lead to increased demand-driven inflation. A positive output gap occurs when actual output exceeds the economy’s full capacity, signaling strong demand. This is considered essential for driving up wages and sustaining inflation around the BOJ’s 2 per cent target.

After eight years of negative interest rates, the BOJ recently shifted its focus away from combatting deflation and towards promoting economic growth. This historic change in policy has led to speculation about when the central bank might raise interest rates again. The yen’s value has fallen to near 152 to the dollar, raising concerns about potential intervention by Japanese authorities to stabilize the currency.

By editor

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