TOKYO, Jan 6 Reuters Japan39;s economic output recovered to near its full capacity for the first time in nearly three years, data showed on Friday, a sign the world39;s thirdlargest economy could be finally pulling out of a prolonged, coronavirus pandemicinduced slump.

The data adds to recent signs that Japan39;s economic recovery will help inflation stay around the central bank39;s 2 target, and could underpin market expectations of a further tweak to its ultraloose policy, analysts say.

Japan39;s output gap, which measures the difference between an economy39;s actual and potential output, stood at 0.06 in the third quarter of last year, narrowing its decline for the fourth straight quarter, an estimate by the Bank of Japan BOJ showed.

It was the smallest drop since Japan39;s output gap turned negative in AprilJune 2020, when the outbreak of the pandemic began jolting the global economy, the estimate showed.

A negative output gap occurs when actual output is less than the economy39;s full capacity, and is considered a sign of weakening demand.

The output gap is among data the BOJ watches closely in determining whether the economy is expanding strongly enough to cause a demanddriven rise in inflation.

Under current projections, the BOJ expects the output gap to have turned positive around October last year and to continue to expand moderately.

A positive output gap is seen by analysts as among prerequisites for wages to rise more, and push inflation sustainably…