Japan’s economy has been running below its full capacity for the 11th consecutive quarter, as per data released by the Bank of Japan on Wednesday. The output gap, which is the difference between actual and potential output, was -0.43% in the fourth quarter of 2022, widening from -0.08% in the previous quarter. This indicates that the conditions necessary for ending ultra-low interest rates have yet to be met. Negative output gaps are seen as a sign of weak demand, which puts downward pressure on inflation. This data is crucial for the BOJ to determine if Japan can hit its 2% inflation target.
The BOJ is expected to phase out its ultra-loose monetary policy as the new governor, Kazuo Ueda, succeeds Haruhiko Kuroda this month. However, the markets are rife with speculation as to when that will happen. Japan's economy narrowly avoided a recession in the October-December period of 2022, expanding by an annualized 0.1% as capital expenditure and consumption remained weak. The country's export-reliant economy is facing a growing slowdown in overseas demand, which clouds its outlook. Although the end of COVID-19 curbs is supporting consumption, it is uncertain whether this will be enough to offset the slowdown.
Overall, Japan's economy is still struggling to emerge from the impact of the COVID-19 pandemic. The output gap data suggests that the ultra-low interest rate policy will continue for the time being. Japan's policymakers are trying to strike a balance between stimulating economic growth and controlling inflation. The current economic situation is not favorable for ending the policy, and it is unclear when that will change. With a new governor at the helm, there may be some changes in the monetary policy approach, but it is unlikely to be a radical departure from the current stance.
