Output Gap

BoJ estimated Japan's output gap for the July-September quarter to be -0.31% of potential GDP, marginally improving from -0.75% in the April-June quarter.

Published quarterly by the Bank of Japan. Updated till the quarter of July-September 2016 (Bank of Japan estimates published on 6th January, 2017)

Brief overview of "Output Gap"

Output Gap measures the difference between actual GDP of the economy and the highest sustainable GDP. The latter is called potential GDP, and the growth in the potential GDP is called potential GDP growth. The output gap is usually measured as a percentage of the potential GDP. 

The output gap is an important indicator for policy makers as it helps them determine an appropriate policy for the economy. A positive output gap indicates a possible inflationary pressure within the economy and vice versa. It is also important for policy makers to understand the source of growth, either labor, capital or productivity. The Bank of Japan publishes a breakdown of growth by estimating contributions from Total Factor Productivity (TFP), labor and capital. 

In the recent history, Japan has experienced the severest negative output gap, exceeding more than 7% to GDP in early 2009 after the Lehman shock. Since then, the output gap has gradually closed, reaching zero in early 2014. However, since then, the output gap has remained steady. In order for the Japanese economy to experience a reflation, the output gap probably needs to further rise towards positive territory. Japan's potential growth rate have been on a gradual decline since the recent peak of 4 to 5% growth in mid 1980s. Most recently, the potential growth rate is estimated to be close to zero. 

Output Gap and Potential GDP based on SNA93