In the October–December quarter, Japan’s economy expanded to its maximum potential for the first time in about four years, a promising development that might permit the central bank to hike interest rates once again.

According to a Bank of Japan (BOJ) assessment released on Wednesday, the output gap in Japan, which quantifies the difference between an economy’s actual and potential output, was +0.02% in the fourth quarter of 2018.

It was the first positive reading in fifteen quarters, coming after a reading of -0.37% in the third quarter.

The BOJ keeps a careful eye on the production gap among other indicators to assess whether the economy is growing rapidly enough to fuel a demand-driven increase in inflation.

When actual output surpasses the economy’s maximum potential, there is a positive output gap, which is interpreted as an indication of robust demand. Analysts view it as one of the few requirements needed for salaries to increase further and stabilise inflation around the BOJ’s 2% objective.

Last month, the BOJ abandoned its unconventional policies, including eight years of negative interest rates, and changed course, moving away from its long-standing goal of using decades of huge monetary stimulus to combat deflation and boost growth.

The markets are watching for any hints about when the central bank may hike interest rates once more.

The yen has dropped to about 152 to the dollar due to expectations that the BOJ will slow down any future rate hikes. Markets view this as an increase in the likelihood that Japanese authorities will intervene by buying yen.

(Adapted from BusinessTimes.com.sg)

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