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Japan's Economy Struggles, Low-Interest Rates May Persist

According to central bank data released on Wednesday, Japan's economic output remained below full capacity for the 11th consecutive quarter from October to December. This suggests that conditions for ending ultra-low interest rates still need to be met.

Bank of Japan
Bank of Japan

Widening Output Gap

The output gap in Japan, which represents the difference between an economy's actual and potential output, increased to -0.43% in the fourth quarter, compared to -0.08% in the previous quarter, as indicated by Bank of Japan (BOJ) data.

Negative Output Gap and Inflation

A negative output gap occurs when the output is lower than the economy's full capacity, signaling weak demand and typically exerting downward pressure on inflation.

BOJ's Assessment of Economic Growth

The BOJ closely examines the output gap data, among other factors, to determine if economic growth and domestic demand are robust enough for Japan to sustainably achieve its 2% inflation target.

Speculation on BOJ's Monetary Policy

Market speculation suggests that the BOJ may phase out its ultra-loose monetary policy when new Governor Kazuo Ueda takes over from the dovish incumbent Haruhiko Kuroda later this month.

Narrowly Averting Recession

Japan's economy experienced an annualized growth of 0.1% in October-December, narrowly avoiding a recession as capital expenditure and consumption remained weak.

Uncertain Economic Outlook

While the easing of COVID-19 restrictions bolsters consumption, a slowdown in overseas demand is casting a shadow on the outlook for Japan's export-dependent economy.