Japan’s economy fully recovers, increasing likelihood of interest rate hike – Firstpost

Japan’s Economy Shows Signs of Growth with Full Capacity Output in Q4 2020

Japan’s economy showed signs of growth during the October-December quarter as its economic output reached full capacity for the first time in four years. This positive development could lead to the central bank considering raising interest rates. According to a report released on Wednesday, Japan’s output gap, which measures the difference between actual and potential output, was at +0.02% in the final quarter of last year, marking a significant improvement from -0.37% recorded in the previous quarter.

The output gap is an essential indicator for the Bank of Japan 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 Bank of Japan has been focusing on tackling deflation and stimulating growth with extensive monetary stimulus. However, it recently ended eight years of negative interest rates in a shift away from this strategy. Markets are closely watching 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 the yen weakening, 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 growth during the October-December quarter marks a promising development that could lead to further interest rate hikes by the central bank if sustained over time.

In conclusion, Japan’s economic growth during Q4 2020 was significant as it reached full capacity for

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