In a promising development for Japan’s economy, the country’s output gap reached full capacity for the first time in four years in the October-December quarter. This significant improvement from the previous quarter was welcomed by the Bank of Japan (BOJ), which closely monitors various economic measures to determine whether the economy is experiencing strong expansion, capable of fueling demand-driven inflation.

A positive output gap occurs when actual output exceeds full capacity, signaling strong demand. This is seen as a prerequisite for raising wages and achieving sustainable inflation around the BOJ’s 2 percent target. The central bank recently ended eight years of negative interest rates, moving away from its focus on curbing deflation and stimulating growth with extensive monetary stimulus.

Markets are closely watching for clues as to when the BOJ might raise interest rates again. Expectations that the central bank will proceed cautiously with further rate hikes have led to weakening of yen, nearing 152 to the dollar. This level is seen as increasing the likelihood that Japanese authorities will intervene by buying yen to stabilize the currency.

By Samantha Johnson

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