Japan sees output exceed capacity the most in decade, BOJ slows bond buying

By Leika Kihara

TOKYO, Apr 4 : Japan’s economic output exceeded its full capacity by the most in a decade in the October-December quarter, the Bank of Japan estimated, a positive sign for the central bank as it seeks to accelerate inflation to its elusive 2 percent target.

A positive output gap occurs when actual output exceeds the economy’s full capacity, as factories and workers operate above their most efficient level to meet strong demand.

A growing positive output gap shows that inflationary pressure is building and thus an important indicator for central banks.

Japan’s output gap, which measures the difference between an economy’s actual and potential output, stood at plus 1.50 percent in October-December, staying in positive territory for a fifth straight quarter, the BOJ estimate showed on Wednesday.

The result, which followed a 1.14 percent positive output gap in July-September, backs up the BOJ’s view that Japan’s economy is gathering enough momentum for inflation to accelerate toward its 2 percent target.

But the central bank is likely to hold off on whittling down its massive stimulus with inflation distant from its target.

“Inflation has been slow despite a tightening job market,” BOJ Governor Haruhiko Kuroda told parliament on Tuesday.

“Debating an exit strategy now would cause confusion,” he said, stressing that the BOJ will maintain its ultra-easy policy until inflation is stably above its target.


After three years of heavy asset buying failed to fire up inflation, the BOJ switched its policy focus in 2016 to one targeting interest rates instead of the pace of money printing.

Under a policy dubbed yield curve control (YCC), the BOJ now guides the short-term interest rate at minus 0.1 percent and the long-term rate around zero percent.

It also keeps a loose pledge to buy bonds so its holdings grow at an annual pace of around 80 trillion yen ($750 billion).

Actual purchases, however, have slowed recently as the BOJ’s dominance in the bond market allows it to keep yields low with reduced buying. The slowdown is also in response to growing criticism that the BOJ’s huge purchases are drying up liquidity.

Separate BOJ data released on Wednesday showed the balance of the bank’s bond holdings at end-March were up 48.6 trillion yen from a year ago, the smallest gain since November 2013.

The BOJ started its huge asset-buying programme, dubbed “quantitative and qualitative easing” (QQE), in April 2013.

“YCC is allowing the BOJ to steadily retreat from the bond market,” said Katsutoshi Inadome, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

“But the BOJ’s presence is still too big, given the negative effect such as falling market liquidity,” he said.

Japan’s economy expanded an annualised 1.6 percent in the October-December quarter, marking the eighth straight quarter of gains, on robust global demand and capital spending.

But core consumer inflation stood at 1.0 percent in February, well below the BOJ’s 2 percent target, as slow wage growth keeps consumers from boosting spending.


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