Japans economy runs below capacity, low rates may stay in place

TOKYO (Reuters) – Japans 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% in the fourth quarter, widening from -0.08% in July-September, Bank of Japan (BOJ) data showed.

A negative output gap occurs when actual output is less than the economys 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% 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.

Japans economy expanded by an annualised 0.1% 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 Japans export-reliant economy.

(Reporting by Leika Kihara; Editing by Jacqueline Wong)