Japan eyes first interest rate hike since 2007 after narrowly avoiding recession

Japan could be on the verge of raising interest rates out of negative territory after revised figures showed the country narrowly avoided recession.

The economy grew by 0.1 per cent in the fourth quarter, compared with an initial reading of a fall of 0.1 per cent.

That could give the Bank of Japan leeway to raise interest rates for the first time since 2007 when it holds its policy meeting next week.

Rates in Japan have been stuck at minus 0.1 per cent since February 2016.

Negative interest rates are used by some central banks to encourage commercial banks to lend and consumers to borrow more in order to boost economic growth.

Rate hikes: Japan’s economy grew by 0.1% in the fourth quarter, compared with an initial reading of a fall of 0.1%

It is also used to reduce the risk of deflation, or price falls, which can sometimes be more damaging to an economy than inflation, when prices increase.

Japan, Switzerland, Sweden and Denmark have negative interest rates or have used them in the past. 

But with Japanese economic growth stronger than initially reported and inflation hitting a 41-year high of 3.1 per cent last year, many believe the central bank will begin raising rates again to bring price rises back to its target of 2 per cent.

Pressure is also coming from strong growth in wages and a shortage of labour, both of which will push up prices further as workers pocket more cash to spend.

The upward revision to GDP was attributed to a jump in business investment, which helped offset lower spending by consumers on goods such as food and energy as a result of rising inflation.

It was enough for Japan to dodge a technical recession, defined as two quarters in a row of falling economic growth. 

Marcel Thieliant, head of Asia Pacific at Capital Economics, said the revision was smaller than most had anticipated.

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