Japan's economy runs below capacity, low rates may stay in place

TOKYO : Japan's economic output ran below full capacity for the 11th straight quarter in October-December, central bank data showed on Wednesday, suggesting that conditions for ending ultra-low interest rates have yet to fall into place.

Japan's output gap, which measures the difference between an economy's actual and potential output, stood at -0.43 per cent in the fourth quarter, widening from -0.08 per cent in July-September, Bank of Japan (BOJ) data showed.

A negative output gap occurs when actual output is less than the economy's full capacity, and is considered a sign of weak demand that typically puts downward pressure on inflation.

The output gap data is among factors the BOJ scrutinises in gauging whether economic growth and domestic demand are strong enough for Japan to sustainably hit its 2 per cent inflation target.

Markets are rife with speculation the BOJ will phase out its ultra-loose monetary policy when new Governor Kazuo Ueda succeeds dovish incumbent Haruhiko Kuroda this month.

Japan's economy expanded by an annualised 0.1 per cent in the October-December period, only narrowly averting a recession as capital expenditure and consumption remained weak.

While an end to COVID-19 curbs is underpinning consumption, growing signs of slowdown in overseas demand are clouding the outlook for Japan's export-reliant economy.