Output Gap

Output gap returns to inflation neutral at end-2018

Published quarterly by the Bank of Japan and Cabinet Office. Cabinet Office estimates updated till the quarter of Oct-Dec 2018. Bank of Japan estimates updated till the quarter of Oct-Dec 2018 (Bank of Japan estimates published on April 3rd, 2019)

Recent data trend

According to the Bank of Japan's estimate, the Output gap of the Japanese economy rose to 2.2% of GDP in the October-December quarter of 2018. The level of the positive gap is the highest since Japan entered an era of deflation in 1998. At the same time, we cannot help feeling a sense of futility in talking about the rise in the output gap in Japan. The idea that the rising positive GDP gap would lead to higher inflation is losing persuasiveness. While it should be true in theory, there is ye...

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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 policymakers as it helps them to 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 policymakers to understand the source of growth, either labour, capital or productivity. The Bank of Japan publishes a breakdown of growth by estimating contributions from Total Factor Productivity (TFP), labour 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. For the Japanese economy to experience a reflation, the output gap probably needs to further rise towards positive territory. Japan's potential growth rate has been on a gradual decline since the recent peak of 4 to 5% growth in the mid-1980s. Most recently, the potential growth rate is estimated to be close to zero. 

For more information, please visit the Cabinet Office website and the BoJ website.

For the estimation methodology employed by the BoJ, please see here.

Output Gap and Potential GDP based on SNA93

Next Release Date: July 3rd, 2019 (BoJ estimate)

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